New Straits Times (29/12/2020) - KUALA LUMPUR: Fitch Ratings expects crude palm oil (CPO) prices to decline in 2021 on higher supply.
The firm assumed the prices would average US$560 per tonne over the year, despite some upside risks such as a strong La Nina weather pattern.
In a statement today, Fitch said Malaysian benchmark CPO spot prices had touched US$900 per tonne in December for the first time since 2012 and averaged at around US$810 per tonne in the fourth quarter (Q4) of 2020 to date.
This was significantly higher than the US$660 per tonne average in Q3 2020.
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It said prices in the second half (H2) of 2020 were supported by weak output and low inventory in Malaysia, robust prices and outlook for a close substitute – soybean oil – due to market expectations of dry weather affecting supply and a recent hike in Indonesian palm oil export levies.
However, Fitch said there were indications that supply and inventory were picking up in Indonesia, the world's largest CPO producer.
High prices are affecting demand from key constituents, such as Indian imports and Indonesian biodiesel.
Fitch said palm oil inventory in Malaysia had shrunk in November to its lowest level since June 2017 due to weak CPO output, which was three per cent lower year-on-year (Y-o-Y).
"Output is down as estates in Malaysia, which depend on foreign workers for around 80 per cent of their manpower, are facing labour shortages due to pandemic-related border restrictions.
"However, Indonesian output and inventory has been steadily rising in the last few months. Palm oil output in October 2020 jumped by 16 per cent Y-o-Y to reach its highest level since at least 2016.
"Inventory was also up by 14 per cent month-on-month (M-o-M)), to be 35 per cent higher than at the start of the year. Output is up due to better weather conditions and higher fertiliser input and should remain high in 2021," it said.
On the demand side, Fitch said purchases by India, the world's largest palm oil importer, were down by 20 per cent M-o-M and seven per cent Y-o-Y in November 2020.
"We believe this was due to the high prices causing Indian buyers, who are highly price-sensitive, to defer purchases.
"Indonesia's biodiesel consumption, another key driver of global demand growth, is also at risk.
"The government is considering cutting its 2021 target to 8.5 million kilolitres (m kl), from 9.2m kl, according to a Bloomberg report. Thus, Indonesia could see flat biodiesel demand, as the market also estimates 2020 consumption at 8.5m kl," it said.
Meanwhile, Fitch said a strong La Nina weather pattern was a key upside risk to its 2021 CPO price forecast, as it could not only hurt palm yields but also support soybean oil prices by causing dry weather in South America.
"A prolonged foreign-labour crunch in Malaysia due to border restrictions is also likely to crimp output and support CPO prices.
"Another upside risk is the continuity of higher Indonesian export levies, which began on December 10, 2020 and should curb exports," it said.
Read more at https://www.nst.com.my/business/2020/12/652992/cpo-prices-decline-2021-fitch