Published on 11 Mar 2021.
RAM Ratings has revised its crude palm oil (CPO) price forecast upwards, to RM3,200 per metric tonne (MT) for 2021 (from RM2,300-RM2,500 per MT previously) on the back of sturdy demand and the tight supply of vegetable oils.
CPO prices were lofty at RM3,831 per MT in the first two months of this year, buoyed by low inventory levels and sturdy soybean oil (SBO) prices amid robust demand and a tight supply of vegetable oils. CPO prices are anticipated to stay fairly strong through 1H 2021 during the low output season and limited supply of vegetable oils. This will inflate prices to levels higher than previously anticipated. That said, we still envisage CPO prices to be lower in 2H 2021 as production recovers during the peak crop season.
Overall CPO prices averaged 29% higher at RM2,686 per MT in 2020 – outperforming our expectation of RM2,400/MT-RM2,600/MT. Although prices weakened in 1H 2020 amid concerns over COVID-19-related demand disruption, they turned around in the second half as such concerns were mitigated by weaker output and strong purchases of rival SBO.
On the supply side, CPO output by key producing nations was weaker than expected in 2020 as palm yields suffered the delayed effects of the extended dry spell in 2019, compounded by a labour shortage in Malaysia. Domestic CPO production shrank 4% to 19.14 mil MT in 2020. Elsewhere, Indonesia’s output slipped to 47.03 mil MT (2019: 47.18 mil MT), thus ending three years of sturdy growth for the republic. Both countries are envisaged to post single-digit output growth this year, driven by generally better weather conditions in 2020. On a broader scale, the US Department of Agriculture estimates the supply of vegetable oils to increase 0.9% in 2020/2021 (2019/2020: +1.9%).
Exports of crude and processed palm oil for Malaysia and Indonesia fell a respective 6% and 9% in 2020, attributable to softer output and some pandemic-related demand disruption. Nevertheless, local inventory levels had plunged 37% to 1.26 mil MT as at end-December 2020, the result of weaker production. On the other hand, Indonesia posted a 6% rise in stock levels to 4.87 mil MT. We anticipate demand to improve this year amid the brighter global economic outlook. This will mitigate the effects of the narrow price differential between CPO and SBO (February 2021: discount of USD41/MT) and the negative impact of the recent hike in India’s effective import duty on CPO.
Meanwhile, Indonesia’s commitment to its B30 biodiesel mandate (rolled out last year) will continue providing firm support for CPO demand. Despite the uptrend in crude oil prices and an unfavourable CPO-gas oil spread, Indonesia revised its export duties in December 2020 to a tiered structure based on CPO prices. This is aimed at replenishing the fund used to subsidise its biodiesel mandate. Indonesia has allocated 9.2 mil kilolitres for 2021 (2019: 8.3 mil kilolitres), which will take up about 8 mil MT of CPO feedstock (about 17% of the republic’s CPO production in 2020).
Karin Koh, CFA
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