Palm Oil Update Indonesia: Rising CPO Price in Q1-2018?
The crude palm oil (CPO) price is expected to strengthen in the first quarter of 2018 due to the impact of the La Nina weather phenomenon and rising CPO demand in the traditional big CPO importing countries. This is good news for stakeholders in the palm oil industry as the price has been sliding around 16 percent so far this year (toward the 2,700 Malaysian ringgit per ton level).
Indonesia-based foreign exchange broker Garuda Berjangka said it sees the palm oil price rising above the 2,800 ringgit per ton level in the first quarter of 2018. Primary reason is the arrival of the rainy season that disturbs both CPO output and distribution channels, hence limits CPO supplies thus supports prices.
Moreover, chances of the presence of the La Nina weather phenomenon, which brings wet weather to Southeast Asia, have increased to 67 percent according to the US Climate Prediction Center. La Nina is expected to be felt, only moderately, between December 2017 and February 2018.
Indonesia is the world's biggest crude palm oil producer and exporter, followed by Malaysia. Together, both countries account for 85 percent of total global CPO production and 91 percent of total global palm oil exports. Based on data from the World Bank, Indonesia produced 34 million tons of CPO in the 2016-2017 season, while Malaysia produced 18.9 million tons in the same period.
Garuda Berjangka says CPO reserves will also decline due to the replanting (rejuvenation) of oil palm trees at plantations. Earlier, the Indonesian government said it launched a new program that aims to replant 20,000 hectares of smallholder palm oil plantations across Indonesia in 2017 (under the condition that these farmers meet the requirements that are stipulated by Indonesian Sustainable Palm Oil [ISPO] certification). It is estimated that around 2.4 million hectares of Indonesia's palm oil plantations are in need of replanting, while 400,000 hectares of crops are considered "old". Indonesia has a total of 11.9 million hectares of palm oil plantation, mostly located on the islands of Sumatra and Kalimantan.
One of Indonesia's biggest suppliers of CPO, Perkebunan Nusantara III, said it targets to produce 2.1 million tons of CPO in full-year 2018, stagnant from the company's expected CPO production this year.
Meanwhile, the Council of Palm Oil Producing Countries (CPOP) may consider to start implementing policies related to palm oil-based jet fuel. In advanced economies there are plans to introduce renewable fuels - made from vegetable oil and animal fat - in an effort to tackle climate change and toxic air. If indeed implemented in 2018, it will surely lead to a higher palm oil price amid rising palm oil demand.
Lastly, the world's biggest CPO importers - India, China and Japan - as well as the Middle East all show good demand for palm oil and therefore should support the palm oil price in the first quarter of 2018.
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