Would China gain from the excess CPO due to lower biodiesel mandate in producing countries?

For China, RBD Palm Olein (RBD PL) and RBD Palm Stearin (RBD PS) are the 2 major palm fractions predominantly imported by the country due to the applicable import duty structure. Both products have an estimated basic demand of 3.5-4.0 million MT and 1.5-1.7 million MT per annum respectively. Nevertheless, being a price sensitive market, the following two basic indicators dictate the demand for RBD PL, these are: (1) the discount of RBD PL price against soybean oil (SBO) in local market, and (2) the import margin for RBD PL.

The above 2 factors would be closely associated with the fundamentals from local and international market. In this case for China, it would be the changes in BMD Futures, RBD PL Futures in Dalian Commodities Exchange (DCE), stock level and import of palm oil in local market. Under impact of Covid-19 pandemic, where Malaysia and Indonesia both countries expected to end up with excess CPO due to the suspension or slowdown in biodiesel demand mandated for 2020, the net impact would be the higher stock level seen in both countries, gradually throughout the year. 

Slowdown of CPO application in biodiesel

According to the mandate given for Malaysia, the increase of biodiesel blending from B10 to B20 in 2020 only confined to Sabah and Sarawak and would take place in 2nd half of this year. Hence according to Ivy Ng from CIMB (as reported by Reuters), this will lead to the excess of estimated 64,000 MT of CPO unused in Malaysia for 2020. Besides the suspension of mandate in Malaysia, we also need to take into consideration the impact of Covid-19 outbreak on the overall demand for diesel, and also palm oil demand in other sectors such as catering. Subsequently, the estimated slowdown in CPO demand in Malaysia is estimated at 350,000 MT. But this volume may not ended up as stock as the outbreak has also led to the slowdown in harvesting activities in Sabah as report by a bank analyst, which may lead to a cut of approximately 100,000 MT CPO output forecasted for 2020.  Hence, the nett excess which will ended in stock would be around 250,000 MT for Malaysia in 2020.

For Indonesia, the latest news (Reuters, 21 Apr) reported that Indonesia Pertamina has cut its 2020 target of gasoline and diesel consumption by 20%. According to UOB Kay Hian, assuming the diesel sales dropped by 20%, the mandated biodiesel consumption would only be at 7.7 million kilo litre versus the targeted 9.6 million kilo litre for 2020. This would cut the demand of CPO for biodiesel in Indonesia by 1.67 million MT (conversion rate for biodiesel is 1.0 kilo litre to 0.88 MT).  Nevertheless, should the B30 mandate is fully implemented despite the slowdown in overall fuel demand, the full year demand for CPO from biodiesel sector would still increase by 1.3 million kilo litre or 1.15 million MT against last year.  As the information on the impact of other sectors during covid-19 outbreak is not available at the time of writing, the nett excess of CPO in Indonesia for 2020 is tentatively projected at 1.67 million MT.

All in all, both Indonesia and Malaysia may experience an excess of 1.92 million CPO stock as a result of slowdown in demand from biodiesel and other sectors due to Covid-19 outbreak.  But, since the excess of CPO is spread evenly throughout the year, the increase of stock level due to this factor would be at 160,000 MT per month (1.92 million divided by 12 months), its impact on CPO price would not be as significant as the overall drop in CPO demand from sectors other than biodiesel.

Dropping CPO Supplies

Nevertheless, the latest Oil World statistic (27 March) reported that under current circumstances, the output of CPO for 2020 would increase by 1.29 million MT, against an increase of 1.67 million MT projected end of last year (drop of 380,000 MT). In another word, the supply of CPO for this year has also been reduced due to the slowdown in harvesting activities at oil palm estate.

Table 1: Palm Oil Production by Country (Oct/Sep)

(‘000 MT) 2019 2020 Change (Vol.) Change (%)
Indonesia 43,700 45,000 1,300 3.0%
Malaysia 19,858 19,650 -208 -1.0%
Thailand 3,050 2,880 -170 -5.6%
Columbia 1,527 1,640 113 7.4%
Nigeria 1,100 1,150 50 4.5%
Other 6,579 6,782 203 3.1%
TOTAL 75,814 77,102 1,288 1.7%

Source: Oil World Weekly 27 March

Hence, this slowdown in output growth would alleviate the pressure on CPO price from the building up of stock as the nett excess CPO supplies would now be at 1.54 million (1.92 mil minus 0.38 mil MT). Again, if we spread this additional stock evenly in 12 months, the stock level would be increasing at the rate of approximately 128,000 MT/month. Fundamentally, this rate of increase in stock would not pose serious impact on CPO price in international market in first half of 2020 but would be more detrimental after it builds-up from Q3 onwards. 

Besides the excess stock situation, the potential drop in PO demand in other major importing countries will be another important factor influencing CPO price. As of today, this impact is not assessed but based on the outlook of global economy projected by IMF, where the GDP growth is forecasted at -3.0% vis-à-vis +3.3% before the Covid-19 outbreak gone out of hand globally.  Hence, we may see the price of CPO go further south in 2020.

Outlook of China’s uptake of PO in relation to the above development

As for China, while the outbreak could be considered fully under control, the global pandemic will certainly dampen the export prospects of Chinese goods. Nevertheless, when come to the demand for palm oil, its price competitiveness against SBO (price spread) would be one primary factor for consideration. Since SBO production in the country is mainly depending on the demand for soybean meal, which is largely projected to be at par as last year, the output of SBO for 2020 would be similar to that of 2019.

As such, this development is favourable to palm oil as the supply-demand imbalance caused by the nett excess CPO would ultimately widen the spread of PO and SBO prices and encourages more import of PO by China in 2020. For the record, as of 22 Apr, the spread of SBO and RBD PL has widened to RMB810/MT (Zhangjiagang), making it feasible for RBD PL to be fractionated to lower melting point olein (low-MP PL) and remain cheaper against SBO in coming months.  

Two major sectors that might see immediate higher uptake of low-MP PL in China would be the catering sector and food processing sector (excluding instant noodles frying). This is in view that more substitution could be done on the blending formula using this palm product in the medium-pack blended cooking oil that is commonly used by caterers and SME food processors.  For other sectors, potential higher uptake will come should the spread widen further to above RMB1,000/MT.    

Prepared By: Desmond Ng 

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