FOLLOWING an impressive rally over June-December 2020 that sent palm oil prices to their highest levels since 2011, Fitch Solutions Country Risk and Industry Research believes that prices have most probably seen their peak for the year in early January (barring a further rally in the soybean complex).
In the near term, it expects palm oil prices to continue easing from current levels as import demand from China and especially from India drops due to uncompetitive prices.
Nevertheless, prices are likely to remain at elevated levels in 1Q 2021 compared with historical prices.
“We are revising up significantly our palm oil price forecast for 2021 as a result of tighter-than-expected supply and as prices are starting the year from very high levels,” Fitch Solutions said in an outlook for palm oil prices.
“We now see them averaging at an 11-year high of RM3,050/tonne in 2021 compared with RM2,580/tonne previously and to current prices of RM3,527/tonne.”
As for Southeast Asia, the research house sees prices easing from current levels over 2021 as production will pick up in region after above average rainfall due to La Niña leads to higher yields in the second half of the year.
Moreover, soybean prices are also likely to head lower from their currently elevated levels as production recovers strongly in 2021/22 with robust plantings.
“We see (palm oil) production recovering by 4.4% in 2020/21. This will be a relatively soft recovery as production remains hampered by a number of issues including labour shortages in Malaysia and above average rainfall in 1Q 2021 due to La Niña (which slows down harvest),” Fitch Solutions forecasts.
“Production growth is likely to be stronger in 2H 2021 as ample rainfall over 4Q 2020-1Q 2021 will support yields later on in the year. We forecast production rising by 4.0% in both Indonesia and Malaysia.”
Meanwhile, the research house opined that it will take time to rebuild stocks in Malaysia given that they come from multi-year low levels which will keep palm oil prices supported over the year.
“Overall, 2020/21 global production will grow at a moderate 4.4% year-on-year (yoy), while we expect demand to rebound robustly in 2021 (by 5.0% yoy) after the decline recorded in 2020 (-2.1% yoy),” Fitch commented.
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 amid the increase in blending rate in Indonesia but still stagnated yoy – will be particularly robust in 2021.
As a whole, import demand over 2021 will also be very strong amid the economic recovery from COVID-19. After a lull in import demand in 1Q 2021 due to elevated prices, Indian and Chinese import demand will pick up again, given robust domestic consumption this year and low stocks.
“In the long term, we see global production averaging 3.2% annually over 2021/2022-2024/2025 which will be below the previous five-year annual average of 5.5% (2016/2017-2020/2021),” added Fitch Solutions. – Jan 19, 2021
