impact of palm oil supply and demand on palm oil …
TRANSCRIPT
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IMPACT OF PALM OIL SUPPLY AND DEMAND ON PALM OIL PRICE BEHAVIOUR
By: Ayat K. Ab Rahman
ABSTRACT
The paper highlights the impact of price behaviour on Malaysian palm oil supply and
demand and discusses its impact in 2013. The price of CPO is dependent on a lot of
factors that vary according to time. CPO price behaviour is determined by fundamental
factors, i.e. both supply and demand factors in the world market. Besides that, CPO
price is also dependent on the market sentiment, which is unpredictable, e.g. the
extreme weather phenomenon, political crisis, new policies or regulations and the
impact of natural disasters. In 2012, CPO price behaviour was affected negatively by a
combination of both supply and demand factors. From the supply perspective, the CPO
stock build-up arising from high carry-over stocks at the beginning of the year and an
increase in CPO production had contributed to the CPO price bearishness in 2012.
Meanwhile, weaker export demand from major importing countries, like China, P.R. and
Pakistan has become a significant factor in contributing to the decline in CPO prices in
2012. The introduction of Malaysia’s new CPO export tax structure effective 1st January
2013 is likely to result in an increase in palm oil exports and thus, indirectly reduce the
high palm oil stock levels in the country. Meanwhile, the B5 programme is to be
expanded throughout Malaysia in 2013/2014, which will also reduce the level of palm oil
stock availability in the country. Besides that, the Malaysian palm oil supply growth in
2013 is expected to increase marginally due to the introduction of the oil palm replanting
scheme with an allocation of RM100 million. The scheme is expected to see the
replanting of 100,000 hectares of unproductive palms and palms over the age of 25
years. These scenarios will indeed be a positive indication for the firming of CPO prices
in the market place in 2013.
Keywords: Price behaviour, supply, demand, fundamental factors and market sentiment
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INTRODUCTION
Crude palm oil (CPO) price behaviour at this moment is more complex, thus creating
high volatility in its prices. This is because palm oil is the largest vegetable oil that is
traded in the world market, with a volume of 38.68 million tonnes in 2011 and estimated
rise at 43.50 million tonnes in 2012. CPO production from Indonesia and Malaysia
amounted to 27.00 million tonnes and 18.79 million tonnes respectively in 2012. Total
palm oil export volume by these two (2) countries in 2012 amounted to 36.56 million
tonnes, with Indonesia at 19.00 million tonnes and Malaysia at 17.56 million tonnes.
CPO price is dependent on a lot of factors that vary according to time. Normally, CPO
price behaviour is determined by market forces, i.e. both supply and demand factors.
Strong demand for oil palm products will lead to an increase in CPO prices in the
market. However, if the supply of palm oil growth is much faster than that of its demand,
CPO prices will be affected in a negative manner. Price of substitute products for palm
oil, like soyabean and rapeseed oils has also become a fundamental factor that is able
to influence CPO prices in the world market. Meanwhile, the price of Brent crude oil also
plays a significant role in terms of influencing CPO prices due to the impact of the
biodiesel that has been aggressively implemented in 2007.
CPO price behaviour depends directly on four (4) major fundamental factors. Firstly,
palm oil supply which comprises CPO production, PO stock and PO import. Secondly,
palm oil demand for export of oil palm products. Thirdly, price of close substitute
products, e.g. soyabean and rapeseed oils. As a result of the biodiesel factor, price of
Brent crude oil also has become the fourth fundamental factor that is able to influence
CPO price behaviour in the world market. Based on supply and demand factors, CPO
price behaviour reflects equilibrium or volatility. Figure 1 shows monthly CPO price
movement from 2008 until 2012. Each point of CPO price shows price equilibrium
determined by supply and demand factors. Based on Autoregression Conditional
Heterocedasticity (ARCH) and Generalize ARCH (GARCH), volatility index is recorded
at 0.8165, which is indicating that high volatility exist in CPO prices.
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Figure 1: Monthly CPO Prices, 2008-2012
Source: MPOB
CPO price is also dependent on market sentiments or the speculation factor that is very
difficult to predict by economists. However, market sentiments can sometimes give high
impact on CPO price behaviour as compared to fundamental factors. Usually, very
difficult to forecast CPO prices which include the element of market sentiments. This is
because market sentiments cannot be measured by time series data. As an
econometrician, dummy variables will be used as a proxy to examine the impact of
market sentiments on CPO prices.
The extreme weather phenomenon like La Nina & El Nino events when taking place in
oil palm & other vegetable oils producer countries will subsequently cause supply
disruption and lead to an increase in prices. Political crisis in the Middle-East will then
contribute to an economic crisis, which will then put pressure on CPO prices to decline
due to low palm oil demand. New policy introduction by importing countries that is
unfavorable to palm oil will cause less demand and will lead to a decline in CPO prices.
As an example, China P.R. strictly enforced regulations for the import of vegetable oils
with effect from January 2013. If there is a problem to palm oil producers to fulfill this
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requirement, CPO prices will then be subsequently affected in a negative manner due to
China, P.R. being one of the world’s largest importer and consumer of vegetable oils.
OBJECTIVES
Therefore, the objective of this paper is to highlight the impact of price behaviour on
Malaysian palm oil supply and demand and to examine fundamental and market
sentiment factors on CPO price behaviour in 2013.
PALM OIL SUPPLY FACTORS
Supply of palm oil comprises CPO Production, PO stock and PO import. However, CPO
production and PO stock are major components for palm oil. Palm oil import does not
significantly influence palm oil supply in view of the fact that the volume of PO import is
not large enough as compared to CPO production and PO closing stock. Table 1 shows
total supply of palm oil in 2012 recorded at 22.31 million tonnes.
Table 1: Total Supply of Palm Oil, 2012 (Million Tonnes)
Month Production of CPO
Stock of PO Import of PO
PO Supply
January 1.29 2.02 0.21 3.52
February 1.19 2.06 0.25 3.50
March 1.21 1.96 0.13 3.30
April 1.27 1.85 0.12 3.24
May 1.38 1.79 0.13 3.30
June 1.47 1.70 0.14 3.31
July 1.69 2.00 0.09 3.78
August 1.66 2.11 0.07 3.84
September 2.01 2.48 0.03 4.52
October 1.94 2.51 0.06 4.50
November 1.89 2.57 0.08 4.54
December 1.78 2.63 0.09 4.49
TOTAL 18.78 2.14* 1.39 22.31
Source: MPOB ; * is average of PO stock in 2012
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PRODUCTION OF CPO
Production of CPO is a palm oil supply component. Based on the monthly time series
data it was revealed that CPO production has a seasonal pattern every year. Low
season of CPO production starts from November until February, moderate season
starts in March until August and peak season either in September or October every
year. The reason why CPO production starts to decline in November until February
every year is due to monsoon rains. Heavy rainfall during the monsoon season was the
reason for being affected by flood and this had contributed to harvesting and collecting
of FFB being disrupted. Figure 2 shows seasonal trend in CPO production in 2009 to
2012. It clearly shows that CPO production started to decline in November every year
and this will continue until February of the following year.
Figure 2: Seasonal Trend in CPO Production
Source: MPOB
During monsoon season, harvesting and collecting activities gets disrupted and FFB on
oil palm trees would become overripe or become rotten. Based on survey (conducted in
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2010/2011), the duration of floods occurring in oil palm planted areas was around a
week until 4 weeks (majority of respondents affected). Therefore, harvesting and
collecting activities get delayed and this had contributed to FFB loss due to FFB
becoming overripe or being rotten. This scenario has led to CPO production to decline
during monsoon season. Table 2, show a number of oil palm estates being affected by
flood in 2010/2011. Highest number of OP estates affected by floods was in Sabah at
137 estates with an area of 139,004 hectares. Other key producing States also affected
by floods were Sarawak, Pahang, Perak and Johor. Total oil palm estates affected by
floods were 401 with an area of 428,912 hectares. Resulting from this phenomenon,
Malaysia CPO production always declines from November until February.
Table 2: Number of Oil Palm Estates affected by Flood in 2010/2011
State Affected oil palm estates
No. Ha
Sabah 137 139,004
Sarawak 57 110,378
Pahang 53 64,064
Perak 45 32,445
Johor 22 22,163
Terengganu 22 22,696
Kelantan 23 19,753
Selangor 18 3,829
N. Sembilan 15 9,166
Kedah 6 3,982
Melacca 2 278
Penang 2 1,154
Total 402 428,912
Source: e-submission, MPOB
To identify significant factors affecting CPO production and to examine the impact of the
monsoon rains and La Nina on CPO production, the model was developed based on
multiple regression technique. General model states as follows:
PDOt = f(MATt, OERt, DUMt)
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Meanwhile, the specific CPO production model as follows:
PDOt = a1 + a2MATt-1 + a3OERt – a4DUMt + et
Where:
PDO = CPO production (tonnes)
MAT = Oil palm mature areas (ha)
OER = Oil extraction rate (%)
DUM = Dummy weather for monsoon rains and La Nina (0 if there is no monsoon rains
& La Nina and 1 if there is monsoon rains & La Nina)
a = Coefficient ; e = Error term
(Note: All time series data in the Log form)
Equation 1 shows the result of regression for CPO production model. The result shows
that CPO production is significantly dependent on OP mature areas (MAT), oil
extraction rate (OER) & dummy weather (DUM). This analysis proves that, monsoon
rains and La Nina will cause a negative impact on CPO production. When there is
monsoon rains and La Niña event, CPO production is expected to decline by about
0.05% as compared to without monsoon rains and the La Niña event. Meanwhile, when
mature areas and OER increased by 1%, CPO production is expected to increase by
1.1% and 1.2% respectively.
PDOt = -3.9699 + 1.1181MATt + 1.2023OERt – 0.0450DUMt----------------------(1)
(-3.7679)** (51.917)** (2.9912)** (-2.0927)*
Note: **, * indicates t-statistics significance at 1% and 5% respectively.
R2 = 0.9925; F-stat = 1,373 (significance at 1%); DW = 2.1298
Table 3 shows the growth rates of CPO production & mature areas. Based on time
series data, there is a positive relationship between CPO production and OP mature
areas (in line with results of the empirical analysis in Equation 1). CPO production and
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mature areas recorded positive growth rates since 1980. However, the percentage of
growth rates recorded a decreasing pattern, especially for OP mature areas.
Table 3: Growth Rates of CPO Production & Mature Areas
Year
CPO Production Mature Areas
Tonnes Growth Rates
(%) Hectares
Growth Rates (%)
1975 1,257,573 - 641,791 -
1980 2,573,173 14.32 1,023,306 9.33
1985 4,134,463 9.48 1,482,399 7.41
1990 6,094,622 7.76 2,029,464 6.28
1995 7,810,546 4.96 2,540,087 4.49
2000 10,842,095 6.56 3,376,664 5.69
2005 14,961654 6.44 4,051,374 3.64
2010 16,993,717 2.55 4,853,766 3.61
2012 18,785,139 5.01 5,037,959 0.74
Source: MPOB
Normally, CPO prices are on an increasing trend during monsoon rains. This is due to a
decline in CPO production thus leading to a decline in PO supply and negative
relationship between CPO prices and PO supply (based on an economic theory).
However, this scenario is not always followed through. This is because if the PO supply
shows a declining pattern (supportive CPO prices), but the other factors unsupportive
CPO prices (e.g. decrease in PO export & SBO prices) therefore, CPO prices can be in
a declining trend.
Figure 3 shows the relationship between monthly CPO production and price. Based on
that figure, its clearly shows that in January to February 2011, November to December
2011, and January to February 2012, when CPO production at low season due to
monsoon rains, CPO prices showed an increasing trend. Correlation index for both
variables recorded at negative 0.6683 which is indicating a moderate negative
relationship between both variables.
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Figure 3: Relationship between Production and CPO Price
Source: MPOB
WHAT IS IN STORE FOR 2013: CPO PRODUCTION
Malaysian CPO production in 2013 is expected to increase marginally due to oil palm
matured areas increasing marginally and introduction of oil palm replanting scheme with
an allocation of funds at RM100 million. The scheme is expected to see the replanting
of 100,000 hectares of unproductive palms and palms over the age of 25 years.
Potential of FFB loss estimated at 1.0 million tonnes based on average FFB yield of 10
tonnes hectare-1 year-1. With average OER at 20%, therefore, the estimated potential
CPO production is to decline at around 0.20 million tonnes.
PALM OIL STOCK
Palm oil stock is also a component of palm oil supply and comprises both CPO & PPO.
Significant factors affecting PO stock levels are CPO production, PO import and PO
export performance. The relationship between PO stock and CPO price is negatively
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correlated, i.e. when PO stock increases, price will decline and when PO stock
decreases, CPO price increases. Figure 4 shows monthly PO stock in 2012. High PO
stock during the 1st quarter of 2012 was due to high carry-over stocks in December,
2011 (close to 2.0 Mn T) and the slow PO export performance. During the 2nd quarter of
2012, the decreasing stock trend was due to strong export performance. Meanwhile, for
3rd and 4th quarters of 2012, stock was at high level due to peak production season and
slow export performance.
Figure 4: Monthly Palm Oil Stock Trends in 2012
Source: MPOB
Figure 5 shows the relationship between PO stock and CPO production. This figure
shows that when increase in CPO production, stock of PO also increased. As an
example, due to CPO production increase to 2.00 Mn T in September 2012 from 1.66
Mn T in August (or 21% increase), PO stock increased to 2.48 Mn T from 2.11 Mn T (or
18% increase) for the same period. Correlation index recorded at 0.7383, which is
indicating high positive relationship for both variables.
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Figure 5: Relationship between PO Stock and CPO Production
Source: MPOB
Meanwhile, Figure 6 shows the relationship between PO stock and PO import. Based
on this figure it is very difficult to prove that PO import has positive impact on PO stock
level. As an example, from June until September 2012, while PO import shows a
downward trend, however, PO stock shows an upward trend.
Figure 6: Relationship between PO Stock & PO Import In 2012
Source: MPOB
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RELATIONSHIP BETWEEN PO STOCK & PO EXPORT
Figure 7 shows the relationship between monthly PO stock & PO export in 2012. This
figure proves that PO stock has a negative relationship with PO export performance. As
an example from June until September 2012, when PO export witnessed a weak
performance, PO stock, however, showed an increasing trend.
Figure 7: Relationship between PO Stock & PO Export
Source: MPOB
RELATIONSHIP BETWEEN PO STOCK & CPO PRICE
Figure 8 shows the relationship between monthly PO stock and CPO price in 2012. This
figure shows monthly CPO price behaviour in 2012, was strongly influenced by PO
stock levels. The CPO price bearishness in the 4th quarter of 2012 can clearly be
observed due to high PO stock levels during this period. Correlation index was recorded
at negative 0.8694, thus indicating a strong negative relationship between both
variables.
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Figure 8: Relationship between PO Stock & CPO Price, 2012
Source: MPOB
WHAT IS IN STORE FOR 2013: PALM OIL STOCKS
High carry-over PO stock in December 2012 at 2.62 Mn T had contributed to the high
PO stock level in the 1st quarter of 2013 (to be above 2.0 Mn T). The introduction of the
oil palm replanting scheme is expected to reduce CPO production to 200,000 tonnes.
Meanwhile, the B5 programme is to be expanded throughout Malaysia, which will also
reduce the level of palm oil stock availability in the country. However, the impact of the
oil palm replanting scheme and the B5 programme on PO stock and CPO prices is
expected to be evident during the 3rd and 4th quarters of 2013.
ANNUAL PALM OIL IMPORT TRENDS
Figure 9 shows Malaysia PO import trend was on an increasing trend between 2008
until 2012 with their growth rates recorded at 18.61% for the period of 5 years. In 2012,
the import of PPO was recorded more than that of CPO, with import volume at 795,000
tonnes and 596,000 tonnes respectively. This was due to the export duty on Indonesian
PPO which was lower than that on CPO. In 2012, the export duty on Indonesian PPO
ranged between 3% to 10%. Meanwhile, in comparison, the export duty on CPO in Jan
was 18%, Feb & March at 16.5%, Apr at 18%, May & Jun at 19.5%, Jul & Aug at 15%,
Sept & Oct at 13.5% and Nov & Dec at 9%.
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Figure 9: Annual Palm Oil Import Trends
Source: MPOB
MONTHLY PALM OIL IMPORT TRENDS
Figure 10 shows monthly palm oil import trends in 2011 and 2012. Highest PO import
was recorded in Feb at 189,411 tonnes and 246,419 tonnes respectively. High PO
import during these months was due to low CPO production in Malaysia arising from the
effect of the monsoon rains. In 2011 and 2012, lowest PO import was recorded in Oct &
Sep at 45,478 tonnes & 32,830 tonnes respectively. Low PO import during these
periods was due to the peak CPO production season in Malaysia. This indicates a
negative relationship between PO import and CPO production.
Figure 10: Monthly Palm Oil Import Trends in 2011 and 2012
Source: MPOB
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2011 = 1,305,676 2012 = 1,391,013
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RELATIONSHIP BETWEEN PO IMPORT & CPO PRODUCTION, 2012
Figure 11 clearly shows that when CPO production decreases, PO import increases and
vice-versa. As an example in Feb, CPO production was low at 1.19 Mn T, while PO
import was highest at 0.25 Mn T. Meanwhile, during the peak CPO production season in
Sept at 2.00 Mn T, PO import was lowest at 0.03 Mn T. Correlation index recorded at
negative 0.8364, which is indicating a strong negative relationship between both
variables.
Figure 11: Relationship between PO Import and CPO Production, 2012
Source: MPOB
RELATIONSHIP BETWEEN PO IMPORT AND CPO PRICES
Figure 12 shows relationship between PO import and CPO prices in 2012. Based on
this figure there is no evidence that PO import has any negative relationship with CPO
prices even though PO import as a PO supply component. The reason is due to PO
import volume was not large enough to give an impact on CPO price behaviour in the
market place.
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Figure 12: Relationship between PO Import and CPO Prices, 2012
Source: MPOB
WHAT IS IN STORE FOR 2013: PALM OIL IMPORT
Palm oil import in 2013 is expected to continue to increase marginally. Arising from the
relatively low export tax on PPO by the Indonesian Government in 2013, Malaysia is
expected to continue to export more PPO than CPO.
DEMAND FOR OIL PALM PRODUCTS
The demand for OP products comprises both semi-processed and end products. Table
4 shows total export volume and value of OP products. Arising from the low PO prices
in 2012, as compared to 2011 therefore, the export value of OP products in 2012
decreased to RM71.40 billion as compared to RM80.41 billion in 2011 or decline of
about 11.2%. However, in 2012 total export volume of OP products increased to 24.56
million tonnes as compared to 24.27 million tonnes or an increase of about 1.2%.
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Table 4: Export Volume and Value of Oil Palm Products
Products 2011 2012
Vol. (Tonnes)
Val. (RM Mill.)
Vol. (Tonnes)
Val. (RM Mill.)
Crude Palm Oil Processed Palm Oil
3,477,599 14,515,666
11,103.4 49,368.4
4,633,686 12,929,155
13,450.82 39,506.41
Total Palm Oil 17,993,265 60,471.9 17,562,841 52,957.24
Crude Palm Kernel Oil Processed Palm Kernel Oil
205,457 970,746
908.4 5,188.9
220,132 863,344
653.27 3,441.09
Total Palm Kernel Oil 1,176,203 6,097.4 1,083,476 4,094.35
Palm Kernel Cake Oleochemicals Biodiesel Finished Products Others
2,227,410 2,181,430
49,999 402,909 240,456
924.7 10,846.9
179.7 1,717.1
173.8
2,459,526 2,600,812
28,983 360,795 465,197
1,021.16 11,455.66
98.44 1,492.98
275.95
Total OP Products 24,271,672 80,411.4 24,561,620 71,395.77 Source: MPOB
Malaysian palm oil is exported to more than 100 countries and major importing
countries in 2012 were China, P.R., India, EU, Pakistan and USA. However, the three
(3) major export destinations show a decreasing trend in 2012 as compared to 2011,
with China, P.R. declining by 12.1%, Pakistan down by 26.2% and USA declined by
2.4%. However, two (2) major market destinations showed an increase in PO imports,
i.e. both the EU and India. Import of PO by the EU increased to 2.22 million tonnes in
2012 as compared at 2.00 million tonnes in 2011 or an increase of 10.7%. Meanwhile,
import of PO by India increased to 2.63 million tonnes in 2012 as compared to 1.67
million tonnes in 2011 or an increase of 57.8%.
Table 5: Palm Oil Export to Major Destinations
No. Country 2011 2012 Difference (%)
1. 2. 3. 4. 5. 6.
China, P.R. European Union Pakistan India U.S.A Others
3,982,128 2,006,093 1,821,009 1,667,908 1,054,997 7,461,130
3,501,677 2,220,794 1,343,254 2,631,406 1,029,443 6,836,284
(12.1) 10.7
(26.2) 57.8 (2.4) (8.4)
Total 17,993,265 17,562,858 (2.4) Source: MPOB
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DEMAND FOR PALM OIL
The Malaysian PO industry is more export-oriented. This is because a large portion of
PO is exported as PPO as compared to CPO production, ranging from 86% to 98% for
the period between 2005 to 2012 (Table 6). In 2005, Malaysia CPO production recorded
at 14.96 million tonnes and processed palm oil (PPO) export at 13.45 million tonnes or
89.9% out of total CPO production. Meanwhile, in 2010 the percentage of PPO export
as compared to CPO production was at 98.1% with PPO export at 16.66 million tonnes
and CPO production at 16.99 million tonnes. In 2012, Malaysia CPO production at
18.79 million tonnes and PPO export at 17.56 million tonnes or represented 93.5% out
of CPO production. Therefore, it can be concluded that Malaysia CPO price behaviour
is more dependent on world demand factors as compared to the domestic factor itself.
Table 6: CPO Production and PPO Export (Tonnes)
Year CPO Production PPO Export % Export
2005 14,961,654 13,445,511 89.9
2006 15,880,786 14,423,168 90.8
2007 15,823,745 13,746,823 86.9
2008 17,734,441 15,412,512 86.9
2009 17,564,937 15,880,744 90.4
2010 16,993,717 16,664,068 98.1
2011 18,911,520 17,993,265 95.1
2012 18,785,139 17,562,841 93.5
Source: MPOB
Based on an economic theory, the relationship between OP export products (as proxy
for PO demand) with CPO prices is negatively correlated. Figure 13 shows the
relationship between monthly OP export products and CPO prices in 2011 to 2012.
Based on this figure, the negative relationship between both variables can be witnessed
from July until November 2012, which was when CPO prices declined, and PO export
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increased. The correlation index for both variables was at negative 0.6568, which
indicated a moderate negative relationship.
Figure 13: Relationship between OP Export Products & CPO Prices
Source: MPOB
The demand for PO in the world market is also dependent on price behaviour of the
substitutes product e.g. soyabean (SBO) and rapeseed oils (RSO). Figure 14 clearly
shows that CPO, SBO and RSO prices move in tandem with CPO prices always being
at discount to them. Arising from the fact that PO is a close substitute of SBO, therefore
the wider the gap is between CPO and SBO prices, the higher the PO demand and this
indirectly will lead to increase in CPO prices in world market.
Figure 14: Relationship between SBO, RSO and CPO Prices, 2008-2012
Source: Oil World
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2008 2009 2010 2011 2012
USD/T
Price of CPO Price of SBO
20
PALM OIL DEMAND MODEL
Palm oil demand model was developed based on the multiple regression technique.
The purpose of the model is to identify significant factors influencing export of oil palm
products by Malaysia. The general model can be stated as follows:
DDt = f(CPOt, SBOt, PDOt, STOt, DDt-1)
Meanwhile, the specific PO demand model can be stated as follows:
DDt = c1 – c2CPOt + c3SBOt + c4PDOt – c5STOt + c6DDt-1 + et
Where:
DD = Total OP export products (tonnes)
CPO = CPO price (RM/T)
SBO = Soyabean oil price (US$/T)
PDO = CPO production (tonnes)
STO = PO stock (tonnes)
c = Coefficient ; e = Error term
(Note: All time series data in the Log form)
Equation (2) shows PO demand is significantly dependent on CPO prices (CPO), SBO
price (SBO), CPO production, PO stock (STO) and OP export products at lagged 1.
Analysis proves that, the CPO price and PO stock has a negative impact on OP export
products. Based on the result, when CPO price and PO stock increases by 1%, OP
export products is expected to decline by about 0.11% and 0.08% respectively.
Meanwhile, if SBO price and CPO production increases by 1%, OP export products is
expected to increase by about 0.10% and 0.75% respectively.
DDt = -0.2236–0.1129CPOt+0.1022SBOt+ 0.7478PDOt–0.0833STOt+0.3453DDt-1-----(2)
(-0.8867) (-1.9276)* (1.7956)* (6.0805)** (-1.3354) (3.5796)**
Note; **, * indicates t-statistics significance at 1% and 10% respectively.
R2 = 0.9965; F-stat = 1,759 (significance at 1%); DW = 2.1606
21
WHAT IS IN STORE FOR 2013: EXPORT OF OIL PALM PRODUCTS
Export of oil palm products is expected to increase marginally in 2013. The expected
gradual world economic recovery in the first half of 2013 will contribute to the marginal
increase in OP export products. The introduction of Malaysia’s new CPO tax export
structure, between 4.5% to 8.5% effective in 1st Jan 2013 will contribute to the increase
in CPO export. Meanwhile, the wider price discount between CPO and SBO prices will
boost palm oil export, especially in the 1st quarter of 2013.
RELATIONSHIP BETWEEN BRENT CRUDE OIL AND CPO PRICES
After Malaysia exported palm methyl ester as a biodiesel product and implemented the
B5 programme, there was a strong positive relationship between CPO and BCO prices.
Figure 15 shows started in 2007 until now CPO and BCO prices move in tandem. The
correlation index between both prices recorded at positive 0.7428, which is indicating a
high correlation between both prices.
Figure 15: Relationship between Brent Crude Oil and CPO Prices
Source: MPOB
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2007 2008 2009 2010 2011 2012
USD/Barrel RM/T
Price of CPO Price of Crude Oil
22
FACTORS AFFECTING CPO PRICE BEHAVIOUR: EMPIRICAL EVIDENCE
To identify significant factors influencing CPO price bahaviour, the CPO price model
was developed based on the multiple regression technique. Therefore, all significant
factors expected to influence CPO prices have been included in the Model. Based on an
econometric technique, the general CPO price model can be represented as follows:
CPOt = f(PDOt, STOt, DDt, SBOt, BCOt, CPOt-1)
Meanwhile, the specific CPO price model can be stated as follows:
CPOt=c1-c2PDOt+c3STOt + c4DDt + c5SBOt + c6BCOt + c7CPOt-1 + et
Where:
CPO = CPO price (RM/T)
SS = PO supply (tonnes)
DD = PO demand (tonnes)
SBO = SBO price (US$/T)
BCO = Brent crude oil price (US$/barrel)
e = Coefficients ; e = Error term
Note: All time series data in the Log form
The equation (3) shows that the CPO price behaviour is significantly dependent on all
independent variables in the model. This analysis proves that CPO price behaviour has
a negative relationship with CPO production and PO stock. When CPO production and
PO stock increases by 1%, CPO price is expected to decline by about 0.21% and
0.35% respectively. However, when PO demand, SBO price and BCO price increases
by 1%, CPO price is expected to increase by about 0.15%, 0.55% and 0.04%
respectively.
23
CPOt = 6.2540 – 0.2063PDOt – 0.3466STOt + 0.1465DDt + 0.5541SBOt
(4.5333)** (-2.8679)** (-4.1662)** (2.0034)* (4.2179)**
+ 0.0357BCOt + 0.4389CPOt-1 ------------------------------------------------(3)
(0.5536) (3.5352)**
Note; **, * indicates t-statistics significance at 1% and 5% respectively.
R2 = 0.9020; F-stat = 98.22 (significance at 1%); DW = 1.7825
WHAT IS IN STORE FOR 2013: CPO PRICES
Based on demand and supply factors, it is evident that CPO price is likely to be firmer in
2013. PO supply is expected to increase marginally due to the introduction of the
replanting scheme. Meanwhile, PO demand is expected to be on upward trend due to
the world economic recovery and the new tax structure that helps CPO to be exported
more competitively. Meanwhile, the B5 implementation programme throughout the
country will create additional demand for PO. Wider price discount of CPO vis-à-vis
SBO prices is to boost PO demand in the short-term and can lead to increase in CPO
prices in the short-term.
CONCLUSION
CPO price behaviour is crucially dependent on supply and demand factors. On the
supply side, both CPO production and PO stock play a significant role in terms of
influencing CPO price behaviour. On the demand side, export of oil palm products is a
key factor influencing CPO price behaviour. CPO price behaviour will result in ‘shock’
reaction if the element of market sentiment becomes unpredictable. The combination of
fundamental and market sentiment factors are considered the ‘rule of thumb’ that will
determine CPO price equilibrium in the world market.
24
REFERENCES
1. Ayat. K. Ab Rahman (2012) et al., “The Economic Impact of Northeast Monsoon
and La Nina on CPO production in Malaysia” Oil Palm Industry Economic Journal
Vol. 12, No. 2/2012.
2. MPOB (2012), Malaysian Oil Palm Statistics. Ministry of Primary Industries,
Malaysia, 2013.