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  Production may surpass demand-Expect lower CPO prices in 2018

      

27 June 2018 ( Lagos ): The near to medium term outlook for global CPO prices is bleak, with production likely to outpace demand this year. The production upsurge is being driven by increased CPO output from Malaysia and Indonesia – two exporters which account for c.85% of global CPO supply – following increased planting in the mid 2010’s. 


Demand dynamics are also threatening price outlook as China, the world’s second largest consumer of CPO, looks to shift away from Oil Palm to Soybean Oil consumption. 


Also, India’s decision to raise Palm Oil import taxes (CPO: 30% to 44%, Refined oil: 40% to 50% - highest in more than a decade) should reduce demand from the world’s largest consumer, while the European Union has proposed a 2021 ban on the use of CPO as biofuel. So far, CPO prices have declined by c.6.5% ytd to RM2,444 and is likely to dip below it in H2’18. 


In line with lower global CPO prices, analysts foresee weaker CPO prices in the local market, especially as parallel market rate (the other driver of local prices given that Oil Palm imports remain ineligible for Foreign Exchange at official rate) remains stable in the near-to-medium term – driven by continued CBN currency interventions. 


Furthermore, analysts expect increased CPO imports in H2’18 to weigh on prices, supported by stable parallel market rates. Amidst these, local CPO prices are expected to face downward pressure through 2018, reducing price support for local producers. 


Oil Palm investments will improve output in the medium term 


In spite of the weak price outlook, analysts expect increased Palm oil supply in the medium term, driven by increased government and private investments in the sub-sector. Abia state for one, plans to distribute seven million improved Tenera seeds between 2017 and 2019 under the “Ikpeazu Oil Palm revolution”. 


The seeds, which have a shorter gestation period, are expected to increase output yield. Also, Edo state plans to grow between 100,000-150,000 ha of CPO within the next three years as the state government targets increased production of palm oil. Analysts also expect increased output from the corporate sector, as PZ-Wilmar (a JV between PZ Cussons and Wilmar Int’l) recently announced plans to acquire 50,000 ha of land to add to their existing 39,300 ha of land in Cross River for Oil Palm production.


 Whilst the relatively long gestation period of Palm fruits (5-7 years) mean that the effects would not be seen in 2018, analysts expect stronger CPO output in the medium to long-term as these projects come to fruition. 


Source: Analysts at Vetiva Capital Management



Reporting for EasyKobo on Wednesday, 27 June 2018, in Lagos, Nigeria.




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