A recovery in crude palm oil (CPO) prices is envisaged by the last quarter of this year if the Covid-19 led lockdowns are fully lifted in Malaysia’s major export markets.
In addition, biodiesel production and its use in Malaysia and Indonesia will need to become an economically viable proposition.
According to industry consultant M.R. Chandran, the industry is living through a perfect storm as the coronavirus pandemic and the collapse of the crude oil prices hits CPO demand for food, feed and fuel.
He told StarBiz that “we are witnessing huge demand destruction in major consuming markets, especially in the shuttered hotel and restaurant catering sector”.
Chandran expects India will likely reduce its palm oil imports by at least 2 million tonnes this year.
“These cuts in global demand are boosting inventories, thus resulting in depressed prices. The demand this year to-date has already plunged by 20%-25%, ” he pointed out.
For many planters, the margins will be squeezed, particularly those players whose productivity is less than four tonnes of CPO per hectare.
“These companies will have little option but to introduce painful cost-cutting measures to balance their books, ” he noted.
Chandran said it would also be tough for plantation companies with high overhead charges and borrowings.
In view of the anticipated lower yields in both Malaysia and Indonesia, Chandran expects CPO prices to trade between RM1,950 to RM2,350 per tonne for the remaining months of the year.
Maybank Investment Bank in its latest report said CPO price should strengthen again towards the end of 2020.
“We expect CPO price to trade between RM2,000 and RM2,400 per tonne against RM2,100 and RM2,400 per tonne previously in the second quarter before it trends seasonally lower in third quarter as output picks up, ” added the research unit.
Positively, over the past month, CPO has regained its price competitiveness as its discount has widened against Argentina soyoil (US$199 per tonne), US soyoil (US$122 per tonne) and Germany rapeseed oil (US$368 per tonne).
This implies limited downside risk to CPO price in the immediate term.
Maybank IB has also reiterated that discretionary demand for palm biodiesel is nearly non-existent now as palm oil price has been trading at a premium to gasoil since November last year.
CGS-CIMB Research is less bearish on the CPO price prospects.
While the concerns over demand are valid and the impact is severe, the research house is taking a more optimistic view with average CPO price projected at RM2,300 per tonne for 2020.
“We feel that both Malaysia and Indonesia are unlikely to abandon their biodiesel programmes as the potential implications for smallholders’ incomes can be severe, ” it added.