Indonesia’s tight supply of CPO benefits Malaysia, say industry experts

 Indonesia’s palm oil supply is expected to remain tight and that may augur well for Malaysia, say industry experts.

Glenauk Economics analysts Leow Huey Chen and Dr Julian McGill said in a note that palm oil supply in Indonesia, the world’s largest producer, is expected to remain tight throughout 2024, primarily attributed to lower production levels resulting from adverse weather conditions and high input costs.

The duo anticipate a decline of 200,000 tonnes in Indonesia’s palm oil production in 2024 compared to the previous year. This is expected to maintain Indonesia’s low inventory levels, thereby sustaining high crude palm oil (CPO) prices.

Data from the Indonesian Palm Oil Association (Gapki) showed that Indonesia’s palm oil production fell 16% year-on-year (y-o-y) to 4.25 million tonnes in May 2024, while exports dropped by 12% y-o-y to 1.97 million tonnes. The country’s palm oil stocks were down by 12% y-o-y to 4.09 million tonnes in May.

Given the tight CPO supply from Indonesia, this situation is expected to benefit Malaysia, as consumers are likely to shift their demand towards Malaysian palm oil supplies, CIMB Investment Bank’s head of Malaysia research and regional head of agribusiness research Ivy Ng Lee Fang told The Edge.

“This shift could positively impact the country’s palm oil exports, resulting in reduced stocks and increased prices,” she said.

Meanwhile, Iceberg X Sdn Bhd derivatives trader David Ng commented: “We are likely to see some Indonesian players importing CPO from Malaysia due to the tax differential between Malaysia and Indonesia, which is expected to support Malaysia’s CPO prices.”

Besides, Glenauk Economics Leow and McGill commented that Indonesian FOB CPO prices are unusually at a premium to Malaysian export prices. “We may potentially see increased CPO exports from Indonesia as refining margins continue to be depressed due to high CPO prices”.

Malaysia has maintained its August export tax for CPO at 8% and raised its reference price to RM3,880.86 per tonne from RM3,839.63 per tonne in July, according to data from the Malaysian Palm Oil Board.

Bloomberg news portal reported that the Indonesian Trade Ministry set the August CPO reference price for Indonesia at US$820.11 (RM3,802.37) per tonne. The CPO export tax remains at US$33 per tonne, with an additional levy of US$85 per tonne.

The three-month CPO futures, which have risen more than 15% year-to-date, reached a peak of RM4,197 on April 3 due to supply concerns. The ongoing El Nino weather conditions are exacerbating heat and reducing rainfall, putting additional stress on palm oil trees.

As of 7pm on Tuesday, the three-month CPO futures were trading at RM3,955 per tonne, Bloomberg data showed.