Bursa Malaysia crude palm oil futures face EM headwinds, tax cut offers support

Malaysia ringgit notesMalaysia ringgit notes

Crude palm oil futures on the Bursa Malaysia Derivatives exchange face headwinds on Tuesday despite potential support from a cut on export taxes next month as investors chew over quarterly earnings and weak currencies in emerging markets.

Bursa Malaysia front-month palm oil futures for October fell 1.7 percent on Monday to 2,204 ringgit ($538.88) a metric ton, the steepest one-day fall since July 13, as concerns about the sharp drop in the Turkish lira this month weighed on other emerging markets. Turnover fell to 35,352 lots from 41,774 lots on Friday, while open interest dropped to 280,964 contracts from 290,355.

But support came after Malaysia on Monday cut its export tax on crude palm oil for September to 0 percent from 4.5 percent. Malaysia in May had renewed a tax on crude palm oil at 5 percent after suspending the levy at the start of 2018 to boost shipments. Under the tax, Malaysia has calculated a palm oil reference price of 2,213.73 ringgit ($541.25) per metric ton in September, with levels above 2,250 ringgit incurring a levy.

The Malaysia Palm Oil Board on Friday said July end-stocks of palm oil in Malaysia rose by 1.3 percent to 2.21 million metric tons, marking a second straight month of higher inventories even as exports rose 6.8 percent from June to 1.21 million metric tons. But production in July rose 12.8 percent and is forecast higher on seasonal factors.

An economic crisis in Turkey linked to U.S. sanctions and a growing balance of payments gap saw the lira fall to 7.2 against the dollar on Monday with other emerging market currencies also hit. The Indian rupee dropped to a record low against the dollar and the Indonesian rupiah flirted with a three-year low. The ringgit held steadier as a commodity exporter with palm oil denominated in dollars. But weaker currencies among major buyers such as India is a worry because it can hurt demand.

Ahead, palm oil producer Golden Agri-Resources reports second quarter earnings. OCBC said in a July 19 note to clients that Golden Agri-Resources (GAR) faces currency risks that could dent earnings.

“GAR’s sales to customers within Indonesia and China are denominated in their local currencies, while export sales for most of the group’s products and cost of certain key purchases are quoted in U.S. dollars,” the note said.

“Purchases and operating expenses in Indonesia and China are mainly denominated in their local currencies. This should be accretive operationally to earnings, but the group is also exposed to currency translation risk as financials are reported in U.S. dollars. Based on the annual report, if the Indonesian rupiah weakens against the U.S. dollar by 5 (percent) with all other variables remaining constant, the group’s pre-tax profit would have decreased by US$34.7 million in 2017 and US$30.9 million in 2016, likely impacted by translation losses.”

In earnings news overnight, Singapore-listed commodity trader Wilmar International said second quarter net profit rose five-fold to $316.4 million in the quarter ended June 30, compared with $59 million for the same period a year ago.

Elsewhere, Global Palm Resources reported on Monday that its second quarter net profit tumbled 67 percent to 2.503 billion rupiah, or around S$235,507 or US$171,099, amid lower crude palm oil prices and sales and higher expenses.

And, palm oil producer Kencana Agri reported on Monday it swung to a net loss of US$7.6 million in the second quarter, from a net profit of US$7.11 million in the year-earlier period as the weaker Indonesian rupiah spurred a foreign exchange loss and as crude palm oil (CPO) prices fell.

Get Shenton Wire headlines in your inbox