Review of February 2022 figures:

February’s closing inventory came in higher than traders’ expectation despite the slightly disappointing output due to weak exports. February CPO production of 1.137m MT (-9% MoM, +3% YoY) was 2-5% below our and consensus estimate. Strong Sabah output with steady production from Peninsular Malaysia was offset by weaker Sarawak production. However, closing inventory of 1.518m MT (-2% MoM, +16% YoY) was 12% above what traders had expected, though in line with our expectation (-1%). This was due to weak exports ofonly1.098m MT (-5% MoM, +22% YoY), a strong sign that buyers either switched to alternative oils or adopted a wait-and-see attitude in light of the high palm oil prices. Average CPO price for February 2022 was RM5,931 per MT (+11% MoM, +52% YoY).

Since February, CPO prices have strengthened even further. Palm oil supply, which is still tight, has since been compounded by worsening non-palm oil related factors - disappointing South American soyabean harvest and uncertainty over the availability of Ukrainian sunflower and grains in the world market:

a) Palm oil closing inventory in February may be higher than expected but it was still down MoM and was the lowest for three months. Importantly, the availability of palm oil worsened as Indonesia just raised the quota it required local producers to set aside for domestic use. On 9 March, Indonesia raised this domestic use quota from 20% to 30% with effect from 10 March.

b) Ongoing South American soybean harvest has been disappointing thus far. Dry weather is crimping Brazil’s (top producer) output while heavy rain is now threatening Argentina’s harvest. These downgrades are limiting the likelihood of current season’s soyabean oil (SBO) easing the global oils & fats tightness.

c) With the Russia - Ukraine tension turning into a conflict on 24 Feb, crude oil price has breached US$100 per barrel level providing supportive demand for biodiesel.

d) Meanwhile, Europe had earlier hoped that Ukrainian sunflower oil can ease the tight rapeseed season. But shipping and ports in Ukraine have since ground to a halt and nearly half the world’s sunflower oil export (6-7m MT) is from Ukraine. Finding replacement for this source will be challenging over the next few months.

e) Ukraine is also the third largest exporter of corn (15%) and fifth largest exporterof wheat (10%) while Russia is the largest wheat exporter (20%) in the world. Not surprisingly, corn and wheat prices spiked in late February, complicating an already difficult supply-demand balance in the edible oils market as farmers that are able to plant grains or oil crops on their field have options to plant either – essentially competition for land use has just intensified for oil crops moving into late 2022 and 2023.

February’s exports weakness can be attributable to the high palm oil prices putting off prospective buyers who rather wait-and-see or simply consider alternative edible oils. After all, SBO price premium over palm oil has narrowed to a level where buyers are indifference and with even discounts seen on more recent trades.

Our projection for March:

Historically, FFB harvest starts improving from March onwards until September or October. For this March, we are expecting CPO output of 1.308m MT, a 15% MoM improvement but will not rule out the risk of ongoing labour shortages impeding production capacity. New batches of guest workers are only due from May or June onwards. Another critical factor to eye in March is exports as current CPO prices of >RM7,000 per MT is very elevated.

All in all, we are expecting March to stay tight with gradual improvement in supply within sight. Despite high prices, exports are expected to hold due to demand from Europe and Muslim markets seeking to stock up for the coming fasting month (starting April) and Hari Raya Aidilfitri in early May. Lower closing inventory is possible though we expect only a slight MoM reduction.

Source: Kenanga Research - 11 Mar 2022