Weather events force fall in global palm oil output
Global palm oil production could fall by over 2 million tonnes this year because of the drought caused by El Nino, while further declines may occur due to heavy rains from La Nina later this year, a leading industry analyst said.
“El Nino will pull world 2016 CPO output down by over 2 million tonnes. A Q3 to Q4 La Nina, with heavy rains, would reduce 2016 output by a further 0.4 million tonnes,” said James Fry, Chairman of commodities consultancy LMC International, at an industry conference in Kuala Lumpur on March 9.
El Nino brings scorching heat across Southeast Asia, lowering oil palm fruit yields in top growers Indonesia and Malaysia, which produce about 85% of global palm oil. La Nina typically causes more rain in both countries.
Fry had earlier forecast Southeast Asian production to fall by 4 million tonnes in 2016 on static output in Indonesia, while Malaysia will record a decline as a result of El Nino, which Fry said is the strongest since 1997.
He also forecast CPO prices to climb to RM2,750 per tonne by June on a Brent crude oil forecast of US$35 a barrel, and hit RM2,900 if oil reaches US$40.
“Free-on-board (FOB) CPO will be US$700 by June… As output picks up, the July to December average price will fall back to US$625 FOB and the price will fall further as 2017 unfolds if oil prices are at US$35,” said Fry.
FOB CPO prices would reach US$735 a tonne on US$40 a barrel oil while palm kernel oil will average US$425-450 above CPO in 2016, supported by weak output of oil palm and coconut oil, he said.
Dorab Mistry, a Singapore-based director with Indian consumer goods company Godrej International, said Malaysian palm oil output is expected to decline by a million tonnes for the first half of the 2016 calendar year.
At the 13th International Oils & Oilseeds Conference in Beijing in March, he noted that Malaysian production for the first two months of the year was running more than 100,000 tonnes lower than the corresponding period a year ago. The deficit was expected to expand to at least 350,000 tonnes by the end of March.
“From July we can expect some recovery. However, we have had severe dry weather in Sabah since the second half of January and that is likely to continue until the first half of April. Sabah palm oil production will suffer an extended impact around September 2016.”
Mistry maintained his estimate for Indonesian palm oil production to fall by 1.2 million tonnes and that prices would reach RM3,000 this year.
Indonesian output was forecast to fall in February to 2.3 million tonnes from 2.44 million tonnes a month earlier due to drought and forest fires, its lowest levels in a year. Its annual output is expected to fall to 32.1 million tonnes this year, the first decline since 1998, said the Indonesian Palm Oil Association.
Profits ahead for Southeast Asian palm oil firms
Palm oil inventories are set to drop further as El Nino chips away at yields in Southeast Asia, boosting a rally in prices and helping producers rake in more profits for the first time since 2011.
Palm oil prices have risen almost 9% over two months. Analysts expect the trend to sustain this year as El Nino cuts global output by 2-3 million tonnes, exports pick up and top producers Indonesia and Malaysia mop up more of the oil to meet higher 2016 biodiesel mandates.
Malaysian inventories hit an eight-month low of 2.17 million tonnes in February and, according to MIDF Research, could slump to 1.5 million tonnes later this year – the lowest since early 2011.
Brokerage UOB Kay Hian says there is a high possibility of the world’s biggest buyers, India and China, replenishing their palm oil supplies after low imports in February, tightening stockpiles further. Demand is also likely to get a boost before the Muslim holy month of Ramadan, which begins in June and when consumption of edible oils rises.
Malaysian exports had already picked up 10.5% month-on-month in the first half of March, a cargo surveyor data shows.
This combination of factors could not have come at a more opportune time for Southeast Asian palm oil producing firms, which have been struggling with declining cumulative profits for the past four years with prices down around 22%.
Twelve of the biggest such companies, including IOI Corp and Golden Agri-Resources Ltd, are expected to report combined profit growth of 20% in 2016, according to Thomson Reuters StarMine Mean Estimates.
The challenge for them will lie in their ability to control costs linked to lower output and a 5% tax on April CPO exports from Malaysia after 11 months of duty-free sales.
“It is possible that profits will improve as a result of higher prices but we have to bear in mind that profits will be held down by increasing costs,” said Roy Lim, group plantations director of Kuala Lumpur Kepong Bhd.
Malaysian smallholders reject proposed French palm oil tax
France’s proposal to impose an additional tax on palm oil will harm the lives and livelihoods of over 300,000 small farmers in Malaysia for whom oil palm cultivation is an essential lifeline.
“This tax is unfair, unjustified and discriminatory towards millions of small farmers worldwide. In Malaysia, today, more than one million people would be affected by this damaging new tax,” said Dato’ Haji Aliasak Haji Ambia, President of the National Association of Smallholders Malaysia (NASH).
“Palm oil is a lifeline for smallholders: it enables them to provide prosperity for their families and communities, lifting them out of poverty,” he said in a press statement.
“The French Government claims to be a friend of the developing world, but this new tax will hurt millions of small farmers and local communities who depend on palm oil. The proposed tax in the French National Assembly is a tax on poor people and a tax on small farmers.”
NASH jointly operates the ‘Human Faces of Palm Oil’ project along with the Sarawak Land Consolidation and Rehabilitation Authority and the Malaysian Palm Oil Council.
The social, economic and environmental benefits of palm oil have been recognised across the developing world, with Malaysia as a global model for smallholder development. Some 40% of its oil palm acreage is owned or managed by small farmers.
Palm oil is one of the most successful poverty alleviation tools in Malaysia, having helped to bring down the poverty rate from 50% after Independence, to less than 5% today.
A step closer to free trade between Malaysia and EU
The Malaysia and EU Partnership and Cooperation Agreement (MEUPCA), initialled on April 6, has cleared the way for a Free Trade Agreement to be negotiated between the two parties.
Initialling the agreement for Malaysia was chief negotiator Datuk Ilango Karuppannan, with Ranieri Sabatucci representing the EU.
Malaysian Deputy Foreign Minister, the Hon. Datuk Seri Reezal Merican Naina Merican., witnessed the ceremony in Putrajaya.
The MEUPCA encompasses 60 articles covering a broad range of economic and non-economic sectors in Malaysia and the EU.
“This will serve as a catalyst to strengthen bilateral relations between Malaysia and enhance cooperation in wide-ranging areas including political relations, trade and investment, energy, transport, agriculture, finance, maritime affairs and other areas through dialogue and exchanges of information,” said Ilango.
“The MEUPCA is also an umbrella agreement that will provide the impetus in concluding other bilateral agreements.”
Colombia zero-rates palm oil imports for six months
Colombia has offered a temporary tariff reduction for palm oil and derived products. It has published a decree authorising imports of palm oil at zero rate from the previous 40%, from Feb 29 to Aug 29, 2016, said the Malaysia External Trade Development Corporation (MATRADE).
The reduction applies to palm oil-related categories such as CPO, palm oil and its fractions – whether or not refined, but not chemically modified; crude palm kernel oil; vegetable oils and fats (hydrogenated and re-esterified); margarine (excluding Liquid Margarine); other mixtures or preparations of vegetable oils and fats; and vegetable and animal oils and fats.
Oleochemical products such as stearic acid, oleic acid, and other monocarboxylic industrial fatty acids are included in the measure, MATRADE said in a statement.
Its Trade Commissioner in Miami, Mohd Nadzri Saadon, said this represents a good business opportunity for palm oil and oleochemical manufacturers to make inroads into the Colombian market, provided they can come up with a competitive landed price.
“Based on our interactions with Colombian importers, the sharp depreciation of the Colombian peso against the US Dollar and the fact that Ecuador, the main supplier of palm oil to the market has adopted the US Dollar as its legal tender, has hurt the country’s importers by making imports more expensive,” he added.
Colombian trade statistics show that imports of palm-based products in 2015 were valued at US$129 million. Malaysia’s share is valued at US$917,000 (0.71%) of the import market.