Crude Palm Oil (CPO) prices experienced a drop in Malaysia. The drop falters amid International Monetary Fund’s (IMF) latest projection on lower global growth leading to a further decrease, and prices to fall. However, effects of the decrease against Indonesia export remain unclear.
CPO prices experienced a correction in an early trading at the Malaysia Exchange after making gains in two previous trading sessions. According to Refinitiv, CPO prices fell by 0.15% to MYR 3,882 per ton.
While the drop in CPO prices is notable, the current level remains the highest since April 5th and remains in the 3,800s. Over the past month, prices had risen 3.38%, but decreased by 6.85% annually.
The drop in CPO prices occurred amid positive sentiment regarding expectations of supply tightening and speculation by market participants about changes in Indonesia’s export policy. However, IMF latest projections caused CPO prices to fall even further.
The IMF recently projected that global economic growth in 2023 would reach 2.8%, and 3% in 2024. This latest projection is more pessimistic than prediction provided in January 2023 when the IMF projected global economic growth of 2.9% in 2023 and 3.1% in 2024. With lower global growth projections, demand for commodities, including CPO, could decrease, causing prices to fall.
Indonesia suspends palm oil export permits
Indonesia, the world’s largest producer of palm oil, suspended some palm oil export permits in February to secure domestic supply amid rising cooking oil prices ahead of the Idul Fitri holiday. Traders said that Indonesia is expected to update its domestic market obligation (DMO) policy after Idul Fitri in May.
The government announced early last week that Indonesia plans to set a crude palm oil reference price at $932.69 per toe for the period of 16-30 April. This figure is up from $898.29 per ton in the first half of this month.
Meanwhile, data from the Malaysian Palm Oil Council showed that palm oil stocks fell 21.08% from the previous month to 1.67 million tonnes at the end of March due to a surge in exports. “We expect lower production in April 2023 because of fewer working days during the Hari Raya (Idul Fitri) festival in that month,” said UOB KayHian in a note.
A strong recovery in production is unlikely because palm trees show signs of stress due to excessive rainfall over the past three years and poor land maintenance. According to data from Kargome Surveyor, Malaysia’s exports from April 1-10 fell between 16% and 35.6% from the same week in March.
CPO is influenced by the movement of related oil prices as they compete for a share of the global vegetable oil market. According to technical analyst Wong Tao CPO prices may continue to soar to MYR 3,910 per ton today, and a breakthrough above this level could open the way to a price of MYR 3,980 per ton.
Effects on Indonesia exports to the decreasing CPO oil price
The effects on Indonesian exports of CPO are not however clear as they depend on an assortment of factors. The suspension of a few palm oil trade licences in February to secure domestic supply ahead of the Idul Fitri holiday may have a short-term impact on trades, but traders anticipate Indonesia to overhaul its DMO arrangement after the holiday in May. The declaration early last week that Indonesia plans to set an unrefined palm oil reference price at US$ 932.69 per ton for the period of 16-30 April may also influence exports, but it remains to be seen how this will play out.
On the other hand, the surge in palm oil exports in March due to a drop in palm oil stocks may have a positive impact on Indonesian trades within the short term. However, the anticipated lower production in April due to the Hari Raya celebration, combined with signs of stress in palm trees and poor land maintenance, may result in a decline in trades within the medium to long term.
Also, the speculation by market participants about changes in Indonesia’s export policy may moreover influence trades. It is unclear what changes, in the event that any, will be made to Indonesia’s trade policy, but any changes might have an effect on the export advertisement for unrefined palm oil.
