Fitch: Average palm oil price to hit 11-year high

The research firm upgrades its projection as the current low palm oil inventory is expected to persist throughout 1H21 before recovering in 2H21


FITCH Solutions Country Risk and Industry Research is expecting the average palm oil price to trade at an 11-year high of RM3,050 per tonne this year on the continuation of limited stockpile of palm oil and lower soy oil prices ahead.

The research firm upgraded its projection from RM2,580 as the current low palm oil inventory is expected to persist throughout the first half of the year (1H21) before recovering in 2H21.

“We see prices easing from current levels over 2021 as production will pick up in South-East Asia in 2H21, while soybean and soy oil prices should also head lower later in the year.

“However, it will take time for stocks to rebuild given that they come from multi-year lows and as consumption growth will be strong this year, which will keep palm oil prices supported in 2021 relative to previous years,” Fitch Solutions said.

Palm oil prices, however, are expected to average lower in 2022 as production growth will accelerate while consumption growth will taper off.

“Following an impressive rally over the June-December period last year that sent palm oil prices to their highest levels since 2011, we believe that prices have most probably seen their peak for the year early this month, barring a further rally in the soybean complex.

“In the near term, we expect palm oil prices to continue easing from the current levels as import demand from China and especially from India drops due to non-competitive prices,” it stated.

Further upside risk to its palm oil price forecast is also attributed to a potential tightening of the soybean market due to a worsening weather outlook as a result of La Niña or to stronger than expected Chinese import demand.

The research firm said global production will increase 4.4% compared to last year as the cyclical weather pattern, which is impacting palm oil production, eases, supported by robust demand after the decline in 2020.

“This will be a relatively soft recovery, as production remains hampered by several issues including labour shortages in Malaysia and above-average rainfall in the first quarter of 2021 (1Q21) due to La Niña, which slows down the harvest.

“Production growth is likely to be stronger in 2H21 as ample rainfall over 4Q20 to 1Q21 will support yields later in the year.

“We forecast production to rise by 4% in both Indonesia and Malaysia,” it stated.

Fitch Solutions noted that higher production will be balanced by the retail and bio-diesel sectors, which are expected to rebound beginning 2021.

“Economic activity will be stronger in 2021, along with restaurant sales and fuel use, which will support palm oil food use and biodiesel use.

“Biodiesel demand in Indonesia and Malaysia, which resisted quite well in 2020, will be particularly robust in 2021. Import demand over 2021 as a whole will also be very strong amid the economic recovery from Covid-19,” it stated.