Khor Reports: Our comment on recent steep
CPO price drop. For the first time since the Global Financial Crisis, CPO price
has fallen below Brent.
We are hearing from the
market various reasons. 1) Demand has been relatively stable (China buying
stabilizing, high growth markets reducing buying at high prices etc) vs rising
seasonal supply. 2) Biodiesel mandate in the EU to be cut in the future. 3) Technical
charts have "broken". 4) Malaysia's one year policy paralysis vs
Indonesia's change in export duty structure has resulted in slower sales from
Malaysia, building up stocks. Perhaps most interesting is this one, 5) The
deleterious and unintended impact of Malaysia's policy to add another 2 million
tonnes of CPO export duty free quota in 2012. Market participants commonly say
that they reckon that 1/2 of the usual 3-3.5 million tonne annual quota, has
gone to non-market players. There is suspicion that the additional quota for
this year may have been given mostly if not entirely to non-market players
and/or "market underperformers". After all, this is election or
pre-election year in Malaysia, where political largesse is directed toward likely
supporters i.e. via special contracts, licenses or quotas. In Malaysian
parlance, quota holders are now often dubbed as "AP holders"
(likening them to the import licence multi-millionaires created in the its
tightly controlled automobile market). However, instead of helping clear CPO
stocks in Malaysia and boost prices, the added 2 million tonnes quota may have
seriously backfired. The market reckons that the quota recipients, hoping to
make a fee by flogging the quota certificates, may have found few if no takers among
the big palm oil companies and traders (who are capable of moving the product).
The regular players would see no need to pay a special premium in a big and
liquid market (after all, lower prices will also clear the market and the
quotas will expire). Thus, the special Malaysia CPO quota players may have been
left with quotas they are unable to "palm off." Furthermore, they are
also incapable of effectively moving the CPO into the world market. Worse, some
may have taken trading positions, and with the steep drop in CPO price, may now
also face big trading losses. Thus, has there been an added crunch in the palm
oil market, as a result of Malaysia's shock attempt to generate special quotas
for an unknown group of recipients (there is talk that they are are under
"Official Secrets Act" non-disclosure protection). A lesson in how
politics in the second largest palm oil producing country might create a small
shock to the commodity price? An interesting theory.
AP = "approved permit"
Updated 5.30pm: Note the mention of surrender of the "approved permits" or APs on CPO: "The minister (Bernard Dompok) also noted that for this move to be effective, there has to be curbing exports of duty-free CPO as well. "Out of the quota of five million tonnes of duty free CPO we've allowed to be exported, only half has been utilised. I want the companies which have not used up their quotas to surrender back the approved permits," he added... http://www.mpoc.org.my/Malaysia_to_Slash_CPO_Export_Tax.aspx