This comes amid concerns over slower global economic growth and the possibility of Indonesia shipping out higher-than-usual palm oil exports to clear stocks in the coming weeks, according to CGS-CIMB.
Its analysts Ivy Ng and Nagulan Ravi said spot CPO price in Malaysia has fallen 30% to RM4,698 a tonne since Indonesia removed its export ban on May 23.
“The bulk, or 91%, of the price declines occurred since June 10, after Indonesia provided more clarity on the export process as it replaced the export ban with the domestic market obligation (DMO),” they said in a sectorial research note released today.
The DMO requires firms to supply a portion of their products to the domestic market via the government’s bulk cooking oil programme and links DMO volumes to their export permits and quotas/rights.
According to CGS-CIMB, Indonesia has issued export permits for a total of 2.44 million tonnes of palm oil from May until July 5. Of this, 1.35 million tonnes of permits were for the DMO programme, while 1.09 million tonnes were part of the flush out (FO) programme.
Total palm oil exports realised have been 1.66 million tonnes (DMO: 0.9 million tonnes; FO: 0.76 million tonnes) so far.
Rising stocks in Indonesia
Based on CGS-CIMB’s estimates, the changes in export policy throughout the first half of 2022 may have led Indonesia’s palm oil stocks to rise to as high as 8-8.5 million tonnes at end-June 2022. This compared to 3.6 million tonnes as at end-December 2021 and 6.1 million tonnes at end-April 2022.
“As such, we estimate Indonesia will need to speed up exports over the next few months to 3 to 3.5 million tonnes per month to clear stocks ahead of the peak production season,” Ng and Nagulan said.
According to them, the Indonesian government has signalled that it will be facilitating this process to help raise domestic CPO prices.
It recently changed the DMO ratio to seven times of palm oil producers’ domestic sales from five times previously to help accelerate exports.
“We are of the view that to clear the excess stockpile, Indonesia’s palm producers will need to entice buyers by lowering CPO prices – causing local and international CPO prices to fall significantly in recent weeks.
“We think CPO prices could stay weak during the adjustment period and trade at larger discounts over competing edible oils until Indonesia’s palm oil stocks fall to the four to five million tonnes level,” the analysts said.
Malaysia’s CPO inventory grows as well
CGS-CIMB estimated that Malaysia’s palm oil inventory probably grew by 10.5% month-on-month (m-o-m) and 4.2% year-on-year (y-o-y) in June 2022 to 1.68 million tonnes due to higher output as well as lower exports after Indonesia ended its export ban.
“This will push the palm oil inventory level to a seven-month high,” Ng and Nagulan said.
In June, palm oil production in Malaysia likely rose by 6.8% m-o-m – but fell 2.9% y-o-y – to 1.56 million tonnes, according to findings from a survey of planters by the CGS-CIMB futures team.
The m-o-m increase was driven by seasonal factors and a lower base in May due to the holidays.
CGS-CIMB said palm oil exports likely dropped by 10.4% m-o-m and 14.2% y-o-y to 1.2 million tonnes, based on export statistics by cargo surveyors Intertek and Amspec Malaysia.
Ng and Nagulan said the weaker Malaysia exports were due to higher palm oil exports from Indonesia after the lifting of its export ban on May 23, 2022, which shifted some palm oil demand to Indonesia from Malaysia.
On the June 2022 forecast palm oil stock level of 1.68 million tonnes, they said this is 11% below the 10-year historical June average of 1.89 million.
Official figures will be released on July 12.