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Analysis: Recovery of CPO demand
One of the indicators that show improved demand is export volume from major producing countries, such as Indonesia and Malaysia. Indonesia's CPO export volume in June and July 2020 were 2.1 and 2.4 million tons respectively, the same volume as Indonesia’s CPO exports in June and July 2019.
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he COVID-19 pandemic has hit global demand for most products, including crude palm oil (CPO). The United States Department of Agriculture (USDA) in its oilseed report predicts that global consumption of CPO will decline by 2.3 percent year-on-year (yoy) in the September 2019 to October 2020 period. The USDA also predicts that CPO consumption will recover in the next period by 4.2 percent yoy. In a more detailed view, CPO demand actually began to normalize since June 2020.
One of the indicators that show improved demand is export volume from major producing countries, such as Indonesia and Malaysia. Indonesia's CPO export volume in June and July 2020 were 2.1 and 2.4 million tons respectively, the same volume as Indonesia’s CPO exports in June and July 2019.
Similarly, Malaysia’s CPO export volume in June and July were recorded at 1.7 and 1.8 million tons, respectively, higher than the export volume for the same months in 2019. However, Malaysia's CPO export volume in August of 1.6 million tons was slightly lower than in August 2019. Both Indonesia and Malaysia’s CPO export volumes recovered after many countries began to gradually relax their lockdown measures.
From the perspective of consumers, India's CPO import volume in July was recorded at 0.8 million tons, or 1.4 percent higher than the same period in 2019. This is the first positive monthly yoy growth of India’s CPO import volume since August 2019.
Furthermore, the CPO import volume of several European Union (EU) member countries, such as France, Italy and the Netherlands, has gradually recovered since May. On the contrary, China's CPO import volume has not recovered. With the tensions of the US-China trade war not as intense as last year, China appears to have switched back to soy oil from CPO in its vegetable oil consumption, with China’s soybean import volume gradually growing since May.
The recovering CPO demand is also reflected in price hikes. Malaysia’s CPO benchmark price has steadily increased since May until now. The average CPO price in June was US$573 per ton, higher than its average price in May of $504 per ton. The price continued to improve in July and August, hitting $616 and $676 per ton, respectively.
The CPO price even broke the $700 per ton level in early September. The CPO price on Sept. 14 closed at $703 per ton, a decline of 5.5 percent year to date. The average CPO price in the January-September period has been $606 per ton, much higher than the average price in the same period last year at $495 per ton. The CPO price gradually returned to its pre-COVID-19 level in early 2020 and has been one of the fastest to recover among COVID-19 impacted commodities.
However, will this price recovery trend be sustained throughout 2020? First of all, we will also need to provide an update on the CPO supply situation, not only the demand side, because we think the recent CPO price movements have been caused by both the demand and supply side. The USDA forecast that global CPO production would decline 1.7 percent yoy in the September 2019-October 2020 period and recover by 3.1 percent in the next period.
Furthermore, the USDA predicted that Indonesia’s CPO production would grow by 1 million tons in the same period. Indonesia’s CPO production has flattened since 2018 due to restrictions on new plantations. Conversely, Malaysia’s CPO production is projected to decline by 1.8 million tons. Malaysia’s CPO production has decreased because of lockdown measures, including on CPO plantations for several months. Malaysia also faces a shortage of farm worker because its border is closed to several neighboring countries such as Indonesia.
Overall, the USDA forecasts CPO demand will drop further compared to CPO production in 2020. This means that the CPO price might be slightly corrected due to higher supply, especially after September and October, the peak of monthly CPO production in Indonesia and Malaysia. The CPO price might continue to rally in early 2021, as growth in CPO demand is forecast to outpace supply. One of the main drivers for CPO demand in 2021 will be the implementation of Indonesia’s biodiesel 40 (B40) program, starting in July 2021.
There is one crucial factor that might impact the CPO price in 2021, which is the higher probability of La Niña. La Niña usually affects many agriculture commodities, such as wheat, soybean, palm, coffee, rubber, sugar and cotton. La Niña brings above-average winter-spring rainfall in Australia and Southeast Asia. It can also dry out the southern US while bringing cooler temperatures to the north with the possibility of storms.
Mild-to-moderate La Niña is usually favorable to palm oil and soybean production in the following year. However, extreme La Niña might cause flooding and short-term disruption to harvests and crop quality. For example, extreme La Niña in Brazil in 2011-2012 caused its soybean production to decline by 12 percent. This condition triggered the CPO and soybean prices to rise to their highest prices in Q1 of 2012.
In conclusion, we predict the CPO price will remain above its psychological level at $600 per ton. This will be a safe price level for most CPO producers in Indonesia. The data show that the critical level for the CPO price is $500 per ton. Every time the CPO price has stayed at or fallen below $500 per ton for several months, the credit quality of CPO plantations begin to deteriorate, as indicated by spikes in credit collectability level 2 (late installment payment for a maximum of 90 days since the due date). Hence, a CPO price of $600 per ton or more will give some room for profits and extra maintenance. Our forecast for the average CPO price in 2020 is $589 per ton, due to the lower CPO price in Q2 of 2020. This is in line with Bloomberg's September consensus forecast of $599 per ton for 2020. However, we forecast the average price in 2021 to be $639 per ton with the assumption of a mild-to-moderate La Niña that will balance out the increasing demand in 2021. This is lower than the consensus of $707 per ton.
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Industry analyst at Bank Mandiri
