The oil palm produces two types of oils; crude palm oil from the fibrous mesocarp and crude palm kernel oil from the kernels — AZMAN GHANI/The Star

To understand the trend of CPO industry in Q1/2020 proportionally, it is necessary to show the poor performance of the CPO industry in 2018 and 2019.

Performance Trend in 2018

The CPO Price (CIF Rotterdam) was decreasing by 19.3% to USD 601 per ton on average in 2018 from USD 717 per ton in the previous year. According to GAPKI, the average price of CPO in 2018 was USD 595.5 per metric ton or decreasing by 17% (YoY).

A result of benchmarking toward 11 CPO public companies (among 19 CPO public companies) listed at Indonesia Stock Exchange shows that their sales trend (on average) in 2018 was increasing by 13.8%. Meanwhile, the sales trend for six of the 11 companies (54.5%) was declining.

These figures, however, cannot be used as a reference for the sales trends of CPO companies in general. It is because each of the companies could take different steps to increase their annual sales. The acquisition toward other companies and the opportunity to increase productivity are two main factors enabling some companies to remain experience sales increase, despite the declining price of CPO in 2018. As is known, an increase in sales is also not always proportional to the profits obtained. Amid the decreasing price of CPO in the market, some companies are still able to earn profits and increase their sales. They can earn or increase profits by taking a significant reduction in tax expense, efficiency in production costs, and a significant increase in their production capacity through the addition of new machines or massive partnership patterns with local farmers.

The main reason for the declining price of CPO commodities in the global market in 2018 is the trade war between the USA and China. Due to the price decline, the increasing trend of B20 (and B30) biodiesel cannot evade most of the CPO companies from facing declining revenue.

Several other factors are contributing to the declining price. They are:

–         A decline in oil-gas exports, due to negative campaigns in Europe

–         The imposition of high import duties in India

Performance Trend in 2019

There is not much difference in CPO price trend in 2019 if compared to 2018. The USA-China trade war is still the main factor that makes the CPO prices down.

The following graphic shows the trend of CPO price for 2019:

Other factors contributing to the declining price of CPO commodity in the global market are:

  • The global and regional political turmoil that causes volatility in financial markets
  • The not-yet solved Brexit issue in Europe
  • Security turmoil in Hong Kong
  • The declining productivity of palm oil trees
  • The long dry season in 2018
  • Slight impact of El Nino in Indonesian territory in 2019.

A benchmarking toward 11 CPO public companies (among 19 CPO public companies) listed at Indonesia Stock Exchange shows that their sales trend (on average) in 2019 was decreasing by 6.1%. The decreasing price of CPO is still the main factor leading to the sales decrease. Meanwhile, the sales trend for nine of the 11 CPO public companies (81.82%) was declining. Only two companies show an upward trend in their sales due to acquisitions (sales increase by up to 20%) and the increasing productivity through significant optimization in production cost efficiency (sales increase by 3%).

In 2019, as shown from the above graphic, the increase in CPO prices in the last two months of 2019 cannot cover the decline in the performance of oil palm companies throughout the year. Based on information from several mass media compiled by Visi Global, nine of the benchmarked companies experienced a decreasing revenue in 2019, and a decreasing price of their CPO commodities by some 1-5%.

Meanwhile, regarding the step pattern taken by the 11 CPO public companies, the number of companies that decided to continue to increase their production capacity amid the lower CPO price was fewer. Most of the 11 companies likely tried to avoid possible risks of profit decrease or even a loss if they decided to continue to increase production capacity in the midst of the dropping price of CPO (similar as occurred in 2018). It is a fact that in 2018 those companies already tried to take efficiency in their production costs as optimal as they could, so they did not have any more potential to optimize in 2019.

Performance Trend in Q1/2020 (YoY)

A benchmarking toward 11 CPO public companies (among 19 CPO public companies listed at Indonesia Stock Exchange) shows that their sales trend (on average) in the first quarter of 2020 was increasing by 20.4%. It is believed that the increasing sales trend was related to the increasing price of CPO during the first quarter of 2020.  Their profit was also increasing positively, in line with the significant increase of the US dollar exchange rate against IDR during the quarter. In fact, the US dollar exchange rate touched the worst level since June 17, 1998, when it reached IDR 15,585 per USD.

The increasing price of CPO in the first quarter of 2020 was caused by the dry season, smog, and climate phenomena, such as positive IOD that resulted in the decreasing supply of palm oil. This is contrary to the fact that this year 2020 is expected to be a momentum for the two largest palm oil-producing countries in the world, namely Indonesia and Malaysia, to increase their domestic demand through their B30 and B20 programs. These programs had led to the occurrence of large purchases of CPO and eventually drove up the price of CPO before the end of the year. The CPO price started its rally in mid-October 2019, nonstop, and continuously. In due course, the CPO price became expensive and drew many parties to take profit-taking.

On another side, the strengthening rate of Malaysia Ringgit against the US dollar also makes it difficult for the CPO price to increase significantly. It is a fact that if the CPO price is set in ringgit, so when the ringgit strengthens against the US dollar, the CPO price will become more expensive.

In addition, a benchmarking toward 11 CPO public companies (among 19 CPO public companies listed at Indonesia Stock Exchange) shows that there is no significant change in the payment day between the account payable and account receivable in the CPO industry for the period of Q1/2020 and Q1/2019. Although the day numbers tend to increase, on average, the deadline for the payables and receivable is 0-45 days, except in Q1/2020, when the due time was only 1-30 days from the agreed schedule.

Prospect of Performance in Q2/2020

The following graphic shows the trend of CPO price as of data released by CME Group Inc (a global markets company. Financial derivatives exchange and trades in asset classes that include agricultural products):

Obstacle – 2020

  • Increase in CPO export tax to USD 55 per ton
  • Elimination of lower limit of CPO price for the imposition of export tax
  • Concerns related to the possible second wave of Covid-19 pandemic that could again pressure the CPO prices in 2020

Opportunity – 2020

  • Recovering consumption of CPO and derivatives in China and India
  • Revocation of lockdown in many countries, especially in Europe