Published on 29 April 2015
The price of crude palm oil (CPO) came in at the lower end of RAM’s price forecast of RM2,200/MT-RM2,400/MT for 1Q 2015, averaging RM2,204/MT. Notwithstanding the effects of a weak ringgit, the commodity’s price is expected to remain soft, as concerns over lacklustre demand amid competition from an ample supply of substitute oils and a weak crude oil-price environment weigh on prices. The still-narrow premium of soy oil to CPO (1Q 2015: c.USD90/MT, 2014: c.USD88/MT) could also reduce the appeal of CPO, dampening growth in demand for the commodity as consumers switch to competing oils.
A pick-up in CPO production, as yields recover after disruptions caused by floods and the effects of dry-weather that had depressed CPO production in January and February 2015, may lead to a build-up in Malaysia’s palm oil inventory to over 2 million MT in the near term, further pressuring prices. As at end-March 2015, palm oil stocks in Malaysia stood at 1.87 million MT, a respective 10.5% and 5.2% higher y-o-y and m-o-m.
Nevertheless, we note the potential price catalyst from the successful implementation of Indonesia’s mandate to increase the biofuel content in diesel from 10% to 15%. The B15 mandate is estimated to boost CPO demand by 2 million MT in 2015. Although a higher biodiesel subsidy of Rp4,000/litre and plans to impose levies on the republic’s palm oil exports to fund the B15 programme would be positive to its execution, we remain cautious of the pace of implementation, given that it is still in the preliminary stages and in view of concerns of engine incompatibility with high biodiesel content. Further, the execution of previously initiated mandates had been marred by pricing, infrastructure and logistical challenges.
Please click here to download RAM’s quarterly CPO price outlook.
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