Weak CPO Price: Lower CA Surplus?

HLIB Research
PP 9484/12/2012 (031413)
Weak CPO Price: Lower CA Surplus?
August 25, 2014
ECONOMIC INSIGHT
Background
 Crude palm oil (CPO) export price has experienced an
extended downtrend after hitting a temporary peak of
RM2,922/tonne on 11 Mar 2014. CPO futures (KO3)
traded as low as RM1,999/tonne last Friday (Figure #1).
 The recent pullback in CPO price is mainly on account of:
(i) expected bumper harvest of other edible oil (i.e.
soybean & corn); (ii) slow demand recovery from palm
importing countries (i.e. India & China); and (iii) slowerthan-expected biodiesel implementation in both Malaysia
and Indonesia
 Consequently, our plantation sector analyst has lowered
the CPO price assumption for 2014 and 2015 to
RM2,400/tonne
and
RM2,300/tonne
(from
RM2,700/tonne) to reflect the above developments.
Sia Ket Ee
[email protected]
(603) 2168 1071
Figure #1 Crude Palm Oil Price
RM/tonne
4,500
4,000
3,500
3,000
2,500
2,000
Insights
 We expect weakening of CPO export price to result in
lower current account surplus and hence a weaker MYR
outlook in the near term.
 Malaysia exported 25.7m metric tonnes of palm oil in
2013 (Figure #2), which in turn accounted for 9.0% of total
merchandise exports (RM61.4bn in nominal value). As
imported inputs are minimal (i.e. mostly fertilizers of which
imported value was ~RM200m per year), export selling
price directly influences the net trade surplus derived from
this sector.
 To recap, Malaysia’s current account surplus narrowed to
a quarterly average of RM8.4bn in 1Q-3Q 2013 (Figure
#3), compared with an average of RM25.6bn and
RM13.6bn in 2011 and 2012 respectively. Besides the
culprit of high imports of capital goods, low CPO export
price during this period (average of RM2,330/tonne) also
contributed to the lower pile-up of trade surplus.
 Our calculation shows that a lower CPO price assumption
of RM300/tonne for CPO selling price for 2014 could
potentially erode the annual current account surplus by
RM7.4bn.
 Meanwhile, imports of capital goods are expected to
surge again in 2H14 as Rapid project gathers pace while
overall ETP maintains its momentum.
 If the weak CPO price is sustained into 4Q, we believe
monthly trade data will begin to show narrowing surplus
from August onwards. This development may lead to
uneasy feeling among investors given the threat of “twin
deficit”.
 Notwithstanding the boost from an imminent OPR hike in
September, near-term outlook for MYR may weaken
should macro risks stage a resurgence. As we believe
BNM will stay pat after bring the OPR to 3.50%, any
aggressive Fed rate hike in early 2015 may narrow the
interest rate differential that has been to Malaysia’s favour
since 2008. All-in-all, we expect USDMYR rate to range
RM3.15-3.25/US$ and drift towards the upper-end of
RM3.25/US$ once the market starts the guessing game of
US rate hike as Fed finishes its QE3 tapering in 4Q.
Page 1 of 2
1,500
Jan-11
Oct-11
Jul-12
KO3
Apr-13
Jan-14
CPO export price
Source: Bloomberg
Figure #2 Export Trend of Palm Oil Products
m tonne
30
RM bn
100
25
80
20
60
15
31.8
40
10
5
20
0
0
Palm oil export volume
Palm oil export value (RHS)
Source: MPOB
Figure #3 Current Account Balance
RM bn
35
30
25
19.8
20
16.0
15
10
5
0
1Q10
4Q10
3Q11
2Q12
1Q13
4Q13
Current account balance
Source: BNM & DOSM
25 August 2014
HLIB Research | Economics
www.hlebroking.com
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2. As of 25 August 2014, the analyst, Sia Ket Ee who prepared this report, has interest in the
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25 August 2014

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