CPO prices likely to decline in 2021 as production rises

By NUR HANANI AZMAN / Pic By AMIN NAHARUL

FITCH Ratings Inc expects crude palm oil (CPO) prices to decline from current levels and assumes an average of US$560 (RM2,280) per tonne for 2021, although CPO prices are performing above expectations this year.

The international credit rating agency expects Malaysia’s benchmark spot price to average around US$650 per tonne in 2020, up 26% year-on-year.

Fitch Ratings director Akash Gupta said production yields have started to improve and the impact is likely to become more prominent next year. However, demand is also at risk of lower biodiesel usage in Indonesia.

“We see some upside risk to our forecast due to factors such as a pro-longed labour crunch in Malaysia, which will crimp output.

“A strong La Nina weather pattern could also hurt fresh fruit bunch (FFB) yields and support soybean oil prices,” he said in a Fitch Ratings 2021 Outlook report on Asian Palm Oil yesterday.

Malaysian estates, where foreign workers account for around 80% of their workforce, have been affected by virus-related border restrictions, Akash noted. According to industry estimates, the country’s plantations face a shortage of 10% on their foreign labour requirements.

The labour shortage is causing delays in harvesting and affecting CPO output. Malaysian palm oil inventories as of end-October 2020 were at the lowest level since June 2017.

If restrictions continue, the weakness in output and inventory levels will be sustained and this will support CPO prices in 2021, he added.

The La Nina weather pattern, which induces higher rainfall in Indonesia and Malaysia, should boost palm oil fruit yields and CPO output in 2021 and reduce prices.

However, a strong La Nina could trigger flooding, disrupting harvests and FFB transport to CPO mills, Akash cautioned. La Nina conditions could also cause a drier climate in the eastern Pacific and South America, a major area for soybean production.

Fitch Ratings see risks persisting for Sime Darby Plantation Bhd’s credit profile, which is currently at ‘BBB-’, despite strong CPO prices in 2020.

“We expect free cashflow profiles to weaken next year, due to lower Ebitda and higher capital expenditure (capex) and dividends.

“Companies focused on boosting liquidity in 2020 and scaled back their capex and dividends plan. However, we expect spending and dividends to increase in 2021 in the wake of robust earnings,” it said.

Sime Darby Plantation is likely to focus on replanting to improve their plantation age profiles and their financial profiles.

The company may also find it easier to sell some assets which are low-yielding and have poor profitability in the event of robust CPO prices as they are likely to boost asset valuations.