India’s recent move to cut import tax on Southeast Asian palm oil helped buoy plantation stocks in Malaysia, brightening the outlook for a sector that is enjoying a sharp rise in prices tracking tighter supplies.
The lower duty rate imposed by the world’s biggest buyer of vegetable oil helped to narrow the price gap between palm oil and other competing oils such as soybean and sunflower, raising the appeal of the edible oil exported from Malaysia and Indonesia, analysts said.
“This latest tax revision is set to boost Malaysia’s refined palm oil exports to India in the coming months,” Public Investment Bank’s Analyst Chong Hoe Leong said. “The favorable move should help drive down Malaysian palm oil inventories and provide support to the current strong CPO (crude palm oil) prices.”
The most-traded crude palm oil futures contract on Bursa Malaysia Derivatives for March delivery gained up to 1.4% to 3,096 ringgit on Thursday. Sime Darby Plantation, the world’s biggest palm oil producer by acreage, climbed as much as 1.3% in Kuala Lumpur trading.
The duty on refined palm olein was reduced to 45% from 50%, while the levy on crude palm oil import was cut to 37.5% from 45% under bilateral agreements between Malaysia and India as well as that between India and the Association of Southeast Asian Nations.
India is the top destination for Malaysian palm oil. From January to November, India imported some 4.3 million tons of palm oil, accounting for about 25% of Malaysia’s exports of the commodity used in everything from snacks to cosmetics.
Output will stay weak due to dry weather as well as lower fertilizer usage and replanting exercises, said Kenanga Investment Bank’s Analyst Adrian Kok. Meanwhile, demand remains robust driven by biodiesel mandates and strong orders from China and India, he noted.
Palm oil production has already dropped in November, falling 14% month-on-month, and may continue to fall as oil palm trees enter their low-production season. Stockpile in Malaysia fell 4.1% in November to 2.26 million tons from a month earlier, according to the Malaysian Palm Oil Board.
Palm oil prices have surged nearly 44% in 2019 amid depleting stockpile as production declined and demand climbed. Malaysia and Indonesia, which make up for over 80% of the world’s output, have raised the amount of palm oil in biodiesel blends, partly to prop up the previously weak prices.
Indonesia is seeking to increase the blend of palm oil in biodiesel to 30%, or B30, starting January that would consume an additional three million tons of palm oil. Malaysia aims to adopt the so-called B20 biodiesel program by 2020 that would absorb another 600,000 tons of palm oil.
The strong prices indicate “significant sequential earnings” for Malaysian planters, said Kenanga’s Kok. “Most of the planters have done only minimal forward selling, allowing them to capitalize on the CPO price rally.”
Overall, crude palm oil price outlook remains robust that prompted Kok to upgrade the Malaysian plantation sector to Overweight. He also raised his crude palm oil price forecast to 2,700 ringgit a ton from 2,400 ringgit a ton.