Saturday October 13, 2012
Stabilising CPO prices
By HANIM ADNAN
MALAYSIA may rank as the world’s second largest crude palm oil (CPO) producer after Indonesia but in terms of pricing, the local CPO traded both on the spot and futures market has been the global pricing benchmark for the commodity trading worldwide for more than two decades.
Therefore, when Malaysia’s CPO price plunged to a three-year low last week with the lowest trade clocked in at below RM2,200 per tonne, it caused strong jitters particularly among major producing nations, players and investors in the entire oil palm value chain.
While the price slump is fundamentally due to the rising palm oil stocks, increasing production and slower global economic growth, some quarters are blaming market traders like Godrej Industries’ Dorab Mistry for jeopardising the market with his pessimistic outlook on CPO for end-2012 and the first quarter 2013.
Dorab projected that palm oil inventory in Malaysia will rise to a record high of three million tonnes while Indonesia to four million tonnes by year-end. Some quarters say Dorab’s forecast has led to a general fear that the situation might trigger CPO to trade below RM2,000 per tonne, thus wiping out the good margins which have been enjoyed for quite sometime by many palm oil industry players.
For Malaysia, the recent developments have been a wake-up call for the Government to take a full review on its existing palm oil policy, especially on the CPO export duty structure, which has been unchanged since 1970s.
The Government also has to reconsider last year’s proposal by members of Palm Oil Refiners Association to lower the local CPO export duty and abolish the duty-free CPO quota as they were suffering from severe margin squeeze due to Indonesia’s move to slash by more than half its export duty on refined palm oil products in October 2011.
The Plantation Industries and Commodities Ministry (MPIC) were quick on its feet to propose measures to the Cabinet for consideration last week in its efforts to stabilise the downtrend in CPO prices and eased the high domestic palm oil stocks.
This resulted in the Government’s approval yesterday to implement several measures which include:
·A downward revision of the CPO export duty effective January 2013
·Discontinuation of the duty-free CPO export facility starting January 2013
·The implementation of B10 biodiesel programme from B5 to ensure additional increase of 300,000 tonnes of CPO consumption a year
·Accelarate replanting programme with MPIC to consider incentives for replanting of old and unproductive palm trees.
Earlier this week, MPIC Minister Tan Sri Bernard Dompok met with his Indonesian counterpart to address the CPO price issue. It is reported that the two major producing nations have agreed to jointly set up a supply mechanism to stabilise the CPO prices.
Based on the measures announcement so far, the price of CPO has gain some ground to trade slightly higher at RM2,500 per tonne on Friday compared with RM2,255 per tonne on Oct 2.
Market players generally envisage that the CPO price will likely be restored to RM2,800-RM3,000 per tonne in the first quarter 2013, possibly by February, given the traditionally low palm oil production month.
Malaysian Palm Oil Association (MPOA) chief executive officer Datuk Mamat Salleh says that MPIC has formulated a good mix of policy measures that are appropriate in managing the sluggish CPO market as projected by some market forecasters.
He points out that the Government should always be pre-emptive of future policy issues and market scenarios confronting the Malaysian palm oil industry and must be “prepared” to implement them as and when needed.
Given the approval to revise downward the existing CPO export duty of 23% and discontinuation of the duty-free export quota, Mamat expects local CPO will have the ability to compete thus opening up the existing bottleneck in the export market and reduce the local inventory from the current 2.48 million tonnes.
Furthermore, by supplying CPO (from the stockpile) to re-start local biofuel plants will further reduce the country’s high stocks and make biofuel more attractive in the open market.
He also expects that better cooperation between the two largest CPO producing nations, which controls about 90% of global production, via joint measures will ensure that CPO price will continue to stay stable.
“The key is to implement and roll-out the measures. However, the key enabler to the overall stabilised CPO price equation will come from any well-coordinated and combined adopted measures that hopefully can arise from the government-to-government bilateral talks involving producer stakeholder nations, Indonesia and Malaysia.
“If this can be realised, these will be the game-changer towards a more sustainable and holistic approach for CPO prices,” adds Tek.
On the other hand, he says the sudden downtrend in CPO price that started end of last month could affect the whole spectrum of planters.
Tek points out that the measure of performance for plantation-based public-listed companies (PLCs) in terms of revenue and profitability will be based on their respective financial periods.
“Assuming a swing-back or improvement in prices does not happen so soon, the impact for these PLCs with fiscal year ending December 2012 will be quite different from those starting in July 2012 and ending in June next year.
“On yield productivity, the overall performance for many PLCs this year will consolidate between the productions of year 2010 and 2011 in view of the change in crop pattern.
“Thus, lesser crop and lower prices will be a double whammy for the grower stakeholders this year,” explains Tek.
Prominent plantation adviser Ramesh Veloo says the current trend of CPO prices, which at one point were traded below RM2,200 per tonne, are worrying plantation owners and investors. He also says that stockpiles of both Malaysia and Indonesia will have an impact on the prices.
“Malaysia is more vulnerable to poor demand and price as our palm oil market structure is heavily dependent on exports when compared with Indonesia where its domestic consumption at about 40% leaves some breathing space.”
Ramesh adds that the good palm oil demand from China and India does not guarantee an effective market share for Malaysia as “Indonesia also has the ability to offer more than 22 million tonnes of CPO this year from its almost nine million hectre of planted area versus Malaysia, which is expected to produce 18.6 million tonnes by year-end.”
On the performance of plantation companies, he opines that there will be some impact, especially in terms of a margin compression, as most plantation companies report an all-in CPO cost of production of between RM1,000 and RM1,500 per tonne.
“The impact will be greater for high-cost producers. In fact, some mid-sized companies had reported that a difference of RM100 per tonne of CPO will have a pre-tax profit impact of almost RM30mil to RM35mil, which can be viewed as critical,” says Ramesh.
However, the low margin situation cannot be generalised as it depends on marketing strategies of companies and at what average price were CPO traded during the year.
In the first nine months this year, Ramesh says the average CPO price in Malaysia hovered around RM3,049 per tonne and some plantation companies have made forward sales up to December 2012 at good prices.
“The impact on margins, although expected to be affected by low prices in the next three months (October to December), may not be too critical for some operators, provided that there are no defaults experienced from their forward sales.
“The low CPO prices will have a greater impact on players who are solely involved in oil palm cultivation on marginal land such as peat and hilly areas,” adds Ramesh.
The cost of production of some peat plantation estates in Sarawak and on hilly areas can be higher by 20%-30% due to higher inputs required, such as fertilisers, to achieve optimum yield levels. The impact on margins will clearly surface if yields are low during low CPO prices.
Another sector that will also be affected is small-scale operators and smallholdings. He says the cost incurred by smallholdings and small-scale operators is generally higher than estates owing to the poor economies of scale and the high cost of contract workers in view of the current labour shortage.
In fact, some small-scale operators have raised the issue of mills not accepting their fresh fruit bunches as preference is given to priority suppliers (own sister companies for example) in view of the volatile prices and low CPO take-offs by refineries.
On steps taken by planters during the downfall in CPO prices, Tek of IJM Plantations says; “As price-takers and not price-makers, steps are restricted to continually being prudent in managing cost effectiveness and increase productivity – which is already in place in IJM Plantations.”
He says it is more towards further “tightening the already tight screws” throughout the supply chain but not compromising on standards.
While some capital expenditure may be deferred or reprioritised, Tek adds that IJM Plantations managed to lock-on some swap-selling of its CPO at better prices.
Ramesh, meanwhile, says measures by local planters will include emphasising prudent cost management with improvements in efficiency. “But this should not be misinterpreted as cost-cutting measures.”
Furthermore, labour-saving technology and mechanisation should be intensified to enhance labour productivity. Improvement of land productivity such as yield per ha by maximising crop recovery and minimising wastages, especially during peak cropping months, and managing harvesting operations efficiently needs to be looked into to improve production and reduce unit cost of operations.
“This will minimise the impact of margin compression during low CPO prices,” adds Ramesh.