CPO front month futures on Bursa Malaysia hit a record low of MR1,773/mt or $424.37/mt on November 19, but rebounded in December to around MR2,101/mt, partially driven by rapidly falling Indonesian production and rising domestic prices. With the first quarter CPO futures in contango, the Asian markets expect palm prices to recover. Expectation of a recovery in 2019 palm oil prices are driven by a variety of factors, which include the rationalization of large Southeast Asian inventories, blending mandates, anti-subsidy investigations and the weather.
YET ANOTHER EL NINO
The Australian Bureau of Meteorology's outlook is on the El Nino Alert in December, due to ocean temperatures at El Nino levels. However, the El Nino's Southern Oscillation (ENSO) remains neutral at this point. A note from the Bureau says that despite higher Pacific surface sea temperatures " ... atmospheric indicators such as cloudiness, pressure patterns, the Southern Oscillation Index (SOI) and trade winds have generally remained neutral. This means the ocean and atmosphere are not reinforcing each other, or coupled," which reduces the probability of an El Nino.
An El Nino event next year could reduce production in late 2019, but if the effect is mild then the hit to production could be quite muted.
DEPLETING INVENTORIES?
Indonesia and Malaysia will enter 2019 with burgeoning inventories. Malaysian CPO inventories hit an all time high of 3.007 million mt in November, data from the Malaysian Palm Oil Board showed, while Indonesian inventories hit a high of 4.901 million mt in July, according to GAPKI data, but have been falling since.
By end of October, Indonesian inventories had fallen to 4.407 million mt, GAPKI data showed, and Asian market sources say that Indonesian inventories have fallen further in subsequent months.
Lower Indonesian inventories have been driven in part by rapidly falling seasonal production towards year end 2018, and increased domestic Indonesian consumption, largely due to the enhanced domestic biodiesel mandate, which was extended to the non-Public Sector Obligation or non-PSO in September. CPO demand for the B20 biodiesel mandate is estimated to be around 420,000-440,000 mt per month.
The fall in Indonesian inventories is expected to continue into 2019 and stocks are expected to rationalize by early to mid Q2.
Indonesian CPO sales to destination markets are expected to increase in 2019 because of the removal of the CPO levy of $50/mt. In 2018, it was more attractive for refiners to export value added products, which had lower levies imposed on them, but producers can be expected to concentrate on CPO exports in 2019, sources said.
Malaysian inventories are expected to grow further in December, market sources said, but demand for Malaysian CPO is expected to increase from a key market, India. Increased exports combined with a higher domestic biodiesel blending mandate, could reduce Malaysia's inventories. Already, CPO sales from Malaysia to India have increased in December.
In 2018, India's buying was skewed towards soybean and sunflower oils due to the structure of its import tariffs,. However, the market expects India to reduce duties on both Malaysian CPO and refined bleached and deodorized olein and oil, to honour commitments made in a free trade agreement between India and Malaysia, which should be enforced by December 31, 2018.
This would push Indian buyers towards buying Malaysian CPO. In fact, Indian buyers have piled into the Malaysian market to make purchases for January loading, because spot month physical CPO in Malaysia is at a discount of MR100/mt or more currently, while Indonesian CPO offers are higher.
BIODIESEL MANDATES PROPEL DEMAND
Indonesian PME producers are expecting the domestic biodiesel mandate to increase in 2019, to B25 blends or higher. Indonesia has a general election scheduled on April 7 and the government will aim to please palm oil smallholders. A higher PME blend into gasoil will increase the domestic demand for palm oil and further support CPO prices.
At the moment, Indonesian PME production capacity is around 70% occupied with the domestic mandate, and a rise in the mandate could occupy capacity productively all year round.
Finally, Indonesian PME producers also await the results of a EU anti-subsidy investigation into Indonesian PME imports to the European Union. Market sources expect that Indonesian PME may be barred from the European market by April 2019. However, with a rapidly rising domestic mandate within Indonesia, the loss of European demand on PME may not have much of an impact on either CPO prices or PME production within Indonesia.
Indonesia's loss in PME exports to Europe could be Malaysia's gain, and most Malaysian producers expect to see their PME production capacity gainfully employed during 2019.
But with lower oil prices and higher palm oil prices in late 2018, the PO-GO spread between palm oil futures and ICE Gasoil futures is approaching zero. This would mean an end to discretionary blending of PME into gasoil, so Chinese buyers would disappear from the market.
The PME market could be expected to retreat to pre-2018 days, when European buyers only came out to purchase RED PME for the European mandates when an arbitrage window was open between Asia and Europe.
