KUCHING: Downward pressure on crude palm oil (CPO) prices are continuously coming in the form of plunging crude oil prices, but this is mutually mitigated by the weakening ringgit and the government’s biodiesel mandates.

According to researchers with Affin Hwang Investment Bank Bhd yesterday, the plunge in crude oil price deteriorates biodiesel economics.

“Already battered by weak exports growth and record high US soybean production, plunging crude oil price has put further downward pressure on CPO prices,” it said.

“Brent crude, for example, has plunged 49 per cent from the June high of US$115 per barrel to a low of US$59 per barrel, thereby significantly widening palm oil premium over crude.

“Our new 2015Brent crude oil price forecasts of US$75 per barrel is US$35 lower than the previous forecast of US$110 per barrel.

That translates to a difference of approximately US$257 per metric tonne (MT) or RM900 per MT, thereby significantly raising the government subsidies required for palm-based biodiesel production to be economically viable.”

With government finances challenged by declining revenue, Affin Hwang Research said an important source of demand for palm oil is under threat.

Nevertheless, with the US dollar relatively stable at around the US$720 per MT level, a weaker ringgit is supportive of CPO prices.

“We estimate that the CPO price would have been as much as RM140 per MT lower if not for the 6.7 per cent depreciation in the ringgit to around RM3.50 against the US dollar.

This support is however temporary as we expect the ringgit to firm to a range of RM3.35 to RM3.40 by end-2015.

“Even though there may be short term delays as public finances are reassessed, we still expect mandatory biodiesel targets to be implemented by the Malaysian and other governments over time.

Palm oil as the cheapest and largest feedstock, will continue to benefit.” For Malaysia, Affin Hwang Research believed the estimated additional subsidy of RM650 million can be substantially offset by the additional exports revenue and corporate taxes arising from a RM100 per MT increase in CPO price.

To note, the government has also cut a number of subsidies and will be introducing the GST from 1 April 2015.

“We believe it is in the interests of the government to remain committed on achieving biodiesel targets, even though there may be short term delays as public finances are reassessed,” it opined.

“The correlation between crude oil and CPO prices is also not perfect.

“Furthermore, we expect seasonal decline in yields in the next three months as well as tighter-stock usage ratios for vegetable oils in general and palm oil in particular to support prices next year.

“As such, we are cutting our CPO average selling price forecasts by just RM200 per MT to RM2,400/MT in 2015E and RM2,500 per MT in 2016E-17E.”