17-MONTH HIGH: High inventory level may be short-term bearish for crude palm oil prices, analysts say

MALAYSIA’S bumper oil palm harvest of late comes at a price: weak crude palm oil (CPO) prices.

The country’s palm oil stocks jumped 23 per cent month-on-month to a 17-month high of 2.05 million tonnes in August, and analysts said this is negative for CPO prices, albeit in the short term.

They added that there could be ample supply of edible oils in the near term, which may cause certain buyers to defer their purchases of the commodity.

CPO prices are currently hovering around the RM2,000 per tonne level, its lowest in five years.

CIMB Research said the 2.05 million tonnes were 4.6 per cent higher than the firm’s and consensus forecasts of 1.96 million tonnes.

“We believe that this will be short-term bearish for CPO prices, which have declined 21 per cent year-to-date to RM2,042 per tonne. The main concern is the large global oilseeds and palm oil supply to be harvested in the coming months,” it said in a report yesterday.

The firm expects palm oil stocks to rise by 15 per cent month on month to 2.36 million tonnes in September, driven by higher production. As such, CPO prices should trade in the range of RM1,900-RM2,200 per tonne this month, it said.

MIDF Research said CPO had entered its peak production cycle earlier than expected.

Lower offtake from China caused a drag on Malaysia’s palm oil exports and the unfavourable supply-demand equilibrium has pushed palm oil inventory to the highest level since March 2013, it added.

However, MIDF Research said the government’s announcement of the CPO duty exemption for September and October will help stimulate demand and consequently reduce palm oil inventory to levels below two million tonnes.

Analysts said CPO prices should stabilise in the last quarter of 2014, supported by a seasonal slowdown in production.

“We expect better outlook in 2015 once pricing issue and distribution infrastructure developed in Indonesia’s B10 programme is in full swing,” said RHB Research, which gave the plantation sector a “neutral” recommendation.

Academy of Sciences Malaysia chief executive officer Dr Ahmad Ibrahim said the government and the industry must ramp up biodiesel activities as soon as possible to mitigate the impact of low CPO prices.

Ahmad said the move is long overdue as palm oil and soyabean oil are both overproduced and burning them for energy is the right thing to do right now.

“If we don’t burn now, the prices will continue to be weak ... but this is a cyclical thing as China and India will stock up palm oil and a shortage can make prices better,” he told Business Times.