Crude palm oil prices have been under intense downward pressure for last several months.
Trading currently at around Malaysia Ringgit 2,400 a tonne or close to $800/tonne (free-on-board), the CPO market is poised for a downturn from April onwards when seasonal supply factors will begin to operate.
These include the commencement of peak production season for palm oil in Malaysia and Indonesia as well as supply pressure from a bumper harvest of soyabean in South America.
Stung by some seriously bearish forecasts made just before and during the price outlook conference in Kuala Lumpur early March, some plantation companies seem to have begun to float new theories about possible lower CPO output in Malaysia in the next three quarters. There is risk that market participants may get carried away. Whatever be the so-called revised demand-supply picture that is being put out now, it is abundantly clear that there is simply no warrant for even any short-term price firmness, leave alone for the rest of the year.
Clearly, bearish factors outweigh others. Indeed, financial analysts are underweight on the sector because industry profitability is deteriorating as costs are rising. This will force companies to de-stock rather than build inventory.
Supply factor
From a supply perspective, Indonesian production is likely to remain strong for the next three years at least; and any slowdown will not materialise until about 2016. CPO production in the world’s largest producing country is set to expand by at least 2 million tonnes (mt) each year next 4-5 years because of new plantings that were undertaken in 2007-10.
Contrary to inspired expectations, CPO production is set to register a strong growth of 8-10 per cent this year, taking the world aggregate to 57-58 mt comprising Indonesia (30 mt), Malaysia (20 mt) and others (7-8 mt). The biological up-cycle is still in full vigour and the low cycle will start after Q3 this year, and not earlier.
Slowing demand
While supplies are nearly assured, it is the demand side that needs close attention. CPO prices are not going to be decided by supply growth, but by demand growth; and the demand side is not really looking solid. Disappearance for the year is estimated at 56-57 mt, making the fundamental well-balanced with a bias toward slowing demand.
Globally, vegetable oil demand growth has slowed in the last 5-6 years, and palm oil demand growth has slowed even faster. There is structural slowdown in demand growth, especially in the biodiesel sector where there is palpable lack of new mandates and increased constraints of substitution with CPO. Experts suggest that CPO may be nearing demand saturation. For 2012-13, global biodiesel demand is projected to rise by a mere one million tons, sharply down from 2-4 mt in recent years.
Many market participants are either unaware and do not appreciate the fact that regulatory headwinds for the biodiesel sector are growing. License and quotas as well as threat of anti-dumping duty stymie growth. Importantly, at least one million tonne of used cooking oil is now diverted for biodiesel purpose which obviously eats into the share of palm oil.
So, the road to palm oil price recovery is going to be long and arduous whatever sectoral interests may claim. This writer still holds that CPO prices are poised to decline further to around Ringgit 2,100-2,200 a tonne levels by May and will constantly test the psychological floor of Ringgit 2,000 and possibly breach it by June. Consensus will follow has it happened in 2012.