The crude palm oil (CPO) price weakened 3.85 percent to 2,425 Malaysian ringgit per metric ton in the first quarter of 2018. Key reason behind this decline is increased CPO output in Indonesia and Malaysia, the world's two top palm oil producers that - together - account for around 85 percent of total global CPO production.
Foreign exchange trading company Garuda Berjangka said pressures on the CPO price have also increased after the European Union (EU) proposed - earlier this year - to ban the use of palm oil in biofuel from 2021 in an effort to meet the block's broader climate goals.
Meanwhile, the decision of India, the world's biggest palm oil consumer, to raise palm oil import taxes by a significant margin has also negatively affected export prospects and prices.
Lastly, the global market is being plagued by concerns over a rising trade war between China and the United States. Although palm oil is not affected by the looming trade war in a direct manner, rising uncertainty does make stakeholders avoid palm oil, Garuda Berjangka said. Considering concerns about the trade war makes the US dollar stronger, palm oil should actually become more competitive (as the Malaysian ringgit weakens). But in reality the CPO price has been declining.
In the second quarter of 2018 the CPO price is expected to have room to rise as palm oil demand should grow ahead of the Ramadan, Idul Fitri celebrations as well as national celebrations in India. Meanwhile, CPO production traditionally eases in the April-May period, hence positively affecting prices.
However, on the long term CPO prices will remain under pressure as China, the second-biggest palm oil consumer after India, wants to shift from palm oil consumption to soybean oil. Still, the looming trade war could actually have a positive impact on palm oil. A large chunk of soybean oil is imported into China from the USA. If import tariffs would make it less attractive for China to import US soybean oil, China may decide to keep importing palm oil from Southeast Asia.
A rising palm oil price is crucial for the performance of Indonesia's palm oil companies. It is estimated that for each 10 percent rise in the CPO price, palm oil companies' net profit rise by up to 30 percent.