Thursday, October 4, 2012

Malaysia's political shock to the CPO price?

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...