Vegetable oil: Solid steps of palm oil price sustained by demand
This article has been translated by PwC Indonesia as part of our Plantation News Highlights service. PwC Indonesia has not checked the accuracy of, and accepts no responsibility for the content.
Bisnis Indonesia - Minyak nabati: Derap harga minyak sawit ditopang permintaan
26 July 2023
By: M. Taufikul Basari
Jakarta - The price of crude palm oil (CPO) has fluctuated amid export data sentiment and food commodity trends which have gained momentum from tensions in the Black Sea.
The CPO futures contract price on the Malaysia Exchange rose to its highest level in 5 months at 4,164 ringgit per tonne, which was achieved during trade on Monday (24/7). Although the CPO price was corrected during trade on Tuesday (25/7), it remained above the psychological level.
The most active CPO contract fell 2.26% to 4,070 ringgit per tonne yesterday, following the decline in other vegetable oils as investors took profits from the recent rise in global agricultural commodity prices.
The soybean futures contract price was corrected to US$15.09 per bushel on Tuesday afternoon Indonesian time, after closing at US$15.15 per bushel the previous day, which was the highest level in 3 months.
Among other factors, CPO price was supported by Malaysia’s export data disclosed by various cargo survey agencies. They reported that Malaysia’s exports increased by 10%–19% during the first 20 days of July 2023.
Separately, industry data from Indonesia as the largest CPO producer shows that the export of palm oil and its derivatives reached 2.23 million tonnes in May 2023, compared to only 763,000 tonnes in the same month last year.
Meanwhile, grain price hit its highest level in 5 months earlier this week after Russia attacked Ukrainian ports. However, the fact that the Russian attack did not cause any serious damage was responded by the wheat futures market with a price correction.
Based on Bloomberg data, wheat price on the Chicago futures market fell by 2.2% on Tuesday (25/7) after surging 8.6% the previous day.
Historically, Ukrainian exports have been contributing significantly to the global food supply, and the escalation in the war has led to price volatility throughout the conflict.
“Russia’s bombardment of port infrastructure along the Danube River in Ukraine has increased wheat price significantly. This escalation poses a risk to influence other parts of the commodity complex, especially energy,” said ING analysts Warren Patterson and Ewa Manthey as quoted by Bloomberg.
On the other hand, El Nino, which was previously touted to affect palm oil yields, may only cause a moderate effect.
Head of the Meteorological, Climatological, and Geophysical Agency (BMKG) Dwikorita Karnawati recently revealed that El Nino would reach its peak from August–September. This phenomenon is predicted to be of weak to moderate intensity and may affect water availability and food productivity.
Nevertheless, according to Dwikorita, Indonesia’s geographical position and topography may lead to different weather conditions in various regions. This can cause one region to experience a drought, while its neighbouring areas experience flooding or a hydrometeorological disaster.
Sustainable production
Analysts at PT Korea Investment and Sekuritas Indonesia Nicholas Kevin M and Edward Tanuwijaya in their latest research stated that this year’s palm oil production would not experience a severe decline with reference to BMKG’s information.
Historically, they said, the effect of El Nino on palm oil production took 6–12 months, depending on the intensity and frequency of this weather phenomenon. Hence, they believe that palm oil production for the second half of 2023 will remain strong.
On the other hand, weak demand is expected to improve in the second half. “Recent developments have led to a significant increase in the price difference between CPO and soybean oil, driven by rising soybean oil price due to supply concerns related to drought-affected soybean production in Argentina,” they said in the research.
At the end of 2022, they continued, China significantly increased its imports of palm oil once CPO was traded at a considerably discounted price compared to soybean oil. Both analysts forecasted a similar situation in India during the second half of 2023, in conjunction with the festive season.
“We expect that the combination of the current discount and the upcoming festive season will create more favourable conditions for palm oil imports, which may reduce the high level of palm oil supply in Indonesia and Malaysia,” he said.
Meanwhile, the effect of EU regulation on deforestation is likely to be limited. The EU regulation requires all companies to emphasise traceability and prohibit clearing forests for export products such as palm oil.
The regulation went into effect on 29 June 2023 and the main prohibition will not take effect until 30 December 2024.
“We see no significant direct threat to the issuers covered by this regulation, except for AALI, because around 5% of its exports were directed to the EU market in the first quarter of 2023. Other than that, DSNG, LSIP, TAPG, and SSMS are domestic players,” they continued.
Companies that are already RSPO certified should have no difficulty meeting EU requirements as their standards prohibit deforestation and promote traceability.
Meanwhile, the profit margin of oil palm issuers is predicted to be pressured by the high cost of fertiliser. Moreover, fertilisation activities increased in the second quarter of 2023 before the estimated El Nino impact.
“We expect profit to be low because local CPO price in the second quarter of 2023 is expected to fall to an average of Rp10,700 per kg [from an average of Rp12,000 in the first quarter of 2023], while production may only grow slightly on a quarterly basis,” they said.
However, the second quarter of 2023 is likely to show better corporate profits due to increased sales volume from the favourable seasonal production cycle and good weather conditions in late 2022. Moreover, there has been an increase in demand.
