CPO prices continue downtrend as concerns about weak demand outweigh flood worries

CPO prices continue downtrend as concerns about weak demand outweigh flood worries
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KUALA LUMPUR (Jan 21): Palm oil prices continued to edge lower yesterday, as concerns about lower demand for the edible oil following lower export data outweigh worries about weaker supply amid torrential rains that have triggered floods in key growth areas in Malaysia.

Crude Palm Oil (CPO) contract for April delivery on Bursa Malaysia Derivatives sank RM42 to RM3,225 yesterday. It is now down RM508 or 13.61% from its one year peak of RM3,733 a tonne on Jan 6. The contract has declined by 365 or 10.17% from the RM3,590 registered on Jan 4, the first trading day of 2021.

Earlier this month, CPO futures breached the RM4,000 mark for the first time since 2008. The previous all-time high for CPO futures was RM4,321 per tonne, recorded in March 2008, based on Bloomberg data.

The commodity's spot price, based on data from the Malaysian Palm Oil Board, has also declined RM387 or 9.71% to RM3,599.50 a tonne from its recent high of RM3,986.50 a tonne on Jan 7. 

“Generally, there are concerns that the high (CPO) prices will lead to weaker demand and the latest export data has revealed weaker demand,” said CGS-CIMB Regional Head of Agribusiness and Head of Research Ivy Ng, when contacted.

Concerns about the unaffordability of the commmodity has offset concerns over weaker supply amid disruptions by the torrential rains, Ng said.

According to Palm Oil Analytics, Amspec Agri has measured a 41.06% or 440,836 tonne decline in Malaysia's palm oil exports to 632,827 tonnes between Jan 1 to Jan 20, compared with the 1.07 million tonnes recorded in the first twenty days of December 2020.

RHB Retail Research’s Joseph Chai told clients in a note yesterady that at its present price level, the April contract has pared the gains accumulated since Dec 1, 2020, showing that a bearish sentiment is overshadowing the bulls. 

“As it failed to find its footing with the Hammer pattern, it is likely that the commodity will extend its correction towards the RM3,200 support level. Coupled with the RSI trending below 30%, whereby negative momentum is growing, we maintain our negative trading bias,” Chai viewed.

For Chai, the contract's immediate support is at RM3,200, followed by RM3,168. Upward resistance has an immediate level of RM3,400, followed by RM3,476 a tonne.

In a separate note, CGS-CIMB Futures said soybeans had traded sharply lower on commercial and technical selling. 

“Much of Argentina and Brazil had good weekend rain coverage, but Argentina could turn drier after this round of precipitation. Damage has been done and the overall success of the crop will still depend on timely precipitation. Harvest is underway in Brazil’s key state of Mato Grosso, with 16% of that state’s crop already sold, compared to 4.8% a year ago. Nationally, 0.4% of Brazil’s soybeans are harvested, compared to 1.8% this time last year because of the planting delays due to dry weather.

"China bought 132,000 tons of new crop US beans ahead of the open, part of the recent improvement in demand after a more than two-month lull in announced sales. Weekly export inspections topped 2 million tons, with China and Spain leading the way,” it noted.

Soybean oil, deemed a substitute oil to palm oil especially in price-sensitive markets, was last traded at US$922.63 a tonne or RM3,732. That's a RM132.5 or 3.68% premium over CPO's last spot price of RM3,599.50.

However, it is worth noting that palm oil prices have mounted a V-shaped recovery since May 2020. Even when compared to this time last year, there has been a significant improvement in CPO prices. 

The tight supply-demand dynamics last year has been the main catalyst for the climb in CPO prices.

Tan Choe Choe