CPO to trade up to RM2,600 next year

The forecast is 14% higher than the RM2,100 midpoint of its previous price range of RM1,900 to RM2,300


MOODY’S Investors Service has raised its medium-term price sensitivity range for crude palm oil (CPO) to between RM2,200 and RM2,600 per tonne over the next 12 months, with a midpoint of RM2,400 due to continued supply constraints.

The forecast is 14% higher than the RM2,100 midpoint of its previous price range of RM1,900 to RM2,300.

The benchmark CPO futures contract closed the week at RM3,288 a tonne, an eight and a half years high.

Moody’s assistant VP and analyst Maisam Hasnain said higher CPO prices will boost palm oil companies’ revenue from their upstream operations of oil palm cultivation and CPO sales.

“If we look at the average CPO prices over the last five to 10 years of RM2,400 to RM2,500 per tonne, it suggests that the current high of around RM3,500 per tonne is unlikely to be sustained over a prolonged period over the next 12-18 months,” he told The Malaysian Reserve in an email reply.

Maisam said labour shortages issues amid pandemic-induced movement restrictions, unfavourable weather conditions and reduced fertiliser application have all contributed to weakening CPO supply and considerably increasing CPO prices this year.

“We expect supply constraints to persist and while CPO prices will likely remain above our revised price range in the near term, lower average prices in the past indicate that the current highs are unlikely to be sustained.

“While we don’t project the aggregate CPO production volume for Malaysia, we believe that labour shortages will contribute to lower CPO production,” he added.

Data published by the Malaysia Palm Oil Board (MPOB) for the 10 months ended October 2020 shows that CPO production is down by 4% year-on-year (YoY).

On Nov 17, MPOB data showed that daily CPO prices rose above RM3,500 per tonne for the second straight day, to the highest level since April 2012.

CPO prices have risen considerably this year amid supply constraints.

Labour shortages because of movement restrictions, a decline in production yields due to dry weather earlier this year and reduced fertiliser application by producers in the past two years during low CPO prices have weakened CPO production and supply.

The CPO price averaged around RM2,600 per tonne for the 10 months through October 2020, 30% higher than around RM2,000 per tonne during the same period in 2019.

According to Moody’s report titled “Palm Oil — Asia supply constraints underpin the increase in our price sensitivity range for crude palm oil”, as a result of the Covid-19 pandemic, a freeze on foreign worker recruitment and border restrictions have reduced the number of workers employed for palm oil harvesting.

Dry weather conditions in Indonesia and Malaysia earlier this year has resulted in lower fresh fruit bunch yields and crude palm oil production.

Adverse weather is likely to disrupt production in the coming months.

The Asean Specialised Meteorological Centre forecasts that La Niña conditions, which can cause higher than average rainfall over South-East Asia, will continue through to March 2021.

The phenomenon could disrupt palm oil production in Malaysia and Indonesia, which account for around 85% of global CPO production.

Palm oil exports from Malaysia — the world’s second-largest palm oil producer — declined 8% YoY for the 10 months ended October 2020, while exports from Indonesia (the largest palm oil producer) declined 11% YoY for the eight months ended August 2020.

Moody’s uses the price ranges and midpoint to project a company’s baseline performance, against which the effects of price movements and performance stability can be assessed.

Despite the potential earnings boost from stronger CPO prices, palm oil companies’ credit quality remains susceptible to slowing economic growth, which could hurt palm oil consumption and operational disruptions from the pandemic, it warned.

Read our earlier report


Moody’s raises medium-term price for CPO