Malaysia's goal to export more palm oil to China may hit a snag

Malaysia, the world's second largest producer of crude palm oil (CPO), is seeking to export more of the commodity to China following Prime Minister Najib Razak's visits to the Middle Kingdom. But this may be a tall order this year, as soybean supplies remain ample and Indonesia, another major CPO producer, still has its competitive advantage over Malaysia.

"China's demand for palm oil depends on how competitive the CPO price is against soybean oil, the availability of domestic edible oils in China, as well as the release of rapeseed oils reserves by the government," Ivy Ng, the regional head of agribusiness of CIMB Investment Bank, told media.

According to Bloomberg data, CPO trades at about 80 US dollars per ton lower than that of soybean oil currently, which is below its 10-year historical average discount of 140 US dollars per ton.

Malaysia's Plantation and Commodities Minister Mah Siew Keong said that he expects palm oil exports to China to further increase in 2017.

"From a historical standpoint, the discount is not as wide or attractive relative to the historical average discount. It does not make it very attractive for them [the Chinese] to buy more than the historical average consumption now," Ng added.

A recent report written by UOB Kay Hian Research shows, soybean planting is expected to continue increasing to meet growing demand from China as meat consumption soars.

This is a long-term negative to the palm oil industry as ample soybean supplies will put a lid on soybean and soybean oil prices, it said.

Soybean has recorded five consecutive years of good production. The US Department of Agriculture (USDA) has forecasted that total cropland for soybean cultivation will exceed 1 billion hectares worldwide in the next decade.

Indonesia and Malaysia, the world's top two palm oil producers, have formed an OPEC-like council for palm oil.

UOB Kay Hian also noted that there is an increasing soybean demand from China as more than 80 percent of China's soybean imports are crushed for soymeal, which is animal feed for chicken and hogs.

In comparison, China's demand for palm oil has been stagnant for the past 10 years at the level of 5 million to 6.6 million tons.

"Even though China's edible oil imports could continue to increase, Indonesia's competitive pricing could well give it a competitive edge over Malaysia," OCBC Bank's economist Barnabas Gan told media.

Currently, Indonesia still commands the lion's share of palm oil exports to China. The world's largest palm oil producer exported 1.3 million tons to China, versus Malaysia's 650,000 tons from January to May. Last year, Indonesia also dominated palm oil exports to China (2.6 million tons), in contrast with Malaysia's exports of 1.8 million tons.

Malaysian Plantation Industries and Commodities Minister Mah Siew Keong said earlier that the Malaysian government hoped to become the world's major exporter of palm oil to China.

With supply growth likely to accelerate into 2017 and seasonal demand fading after Ramadan celebrations, he expects the downward trend of CPO prices will continue in the second half of the year.

"Given the weaker prices of late, we downgrade our palm oil price target to 2,250 ringgit (524 US dollars) per ton at year-end," he said.

According to the Malaysian Palm Oil Board, the CPO price has fallen to 2,543 ringgit per ton as of June 29, from its peak of 3,344 ringgit in February.

(CGTN)