China’s move to sign four purchase intent agreements to buy 1.62 million tonnes of Palm oil from Malaysia worth US$891 million may just be the much needed catalyst to reverse Crude Palm Oil’s prolonged price weakness.
The deal, when executed, will help trim Malaysia’s record high stockpile of Crude Palm Oil at a time when the Industry is facing multiple attacks from the European Union and a plethora of Western lobbyists favouring alternatives which clearly are grounded in self-serving interests.
The combination of this Chinese uptake and the anticipated drop in productivity as Malaysia enters into a low production period may trigger a reversal of the downtrend in CPO prices.
More definitively, changes in the national biofuel mandates in Malaysia and Indonesia which now require a higher percentage of Palm Oil content in biodiesel of up to 10% and 20% respectively is also likely to lend support to an increase in demand and consumption of CPO.
Despite these positives, the current slew of negative economic data from China, U.S. and contracting demand from India will inevitably have a knock-on effect on global growth projections and act as a price dampener.
February data indicates total palm stocks rose by 1.34% to 3.05 million tonnes on month from January while CPO stock rose 2.3% to 1.92 million tonnes. The increase took place despite production contracting 11.1% on-month to 1.54 million tonnes, attributed to declining export numbers and demand contraction while export data reveals a 21.38% on-month volume slippage to 1.32 million tonnes.
Downside pressure is also ballooning due to political posturing by the European Union (EU) against CPO following the decision to classify palm oil as a “high risk” product. This sets the platform for the EU to exclude the use of the Palm Oil in biofuel post 2020 if the Delegated Act is ratified in the next two months.
Appeals by Malaysia’s Primary Industries Minister Theresa Kok and the threat of retaliatory actions against European exports may provide some respite but if the EU’s decision is ratified, CPO prices are likely to be pressured further.
From a technical perspective, daily price charts suggest CPO may continue to drift lower and possibly retest and breach psychological support at MYR2,000 and sink to MYR1,929 before staging a recovery. On the upside, prices may face resistance at MYR2,300 and MYR2,375 vs current price of MYR2,049.
Giri Balakrishnan
Business Development/Analyst
AgriNexus International Ltd