PETALING JAYA: Palm oil prices are expected to decrease slightly from its current levels over the next three to six months due to the vast demand destruction by the Covid-19 pandemic according to Fitch Solutions.
“Although palm oil supply is also being negatively impacted by government containment measures as plantation operations are being disrupted which could support prices in the very near term, we believe demand destruction will be greater and send prices lower later in the year,” it said in a report.
With that the research house has made major production and consumption revisions in key markets, including for Indonesia, Malaysia, India, China and the EU.
For Malaysia, Fitch Solutions revised down its 2019/20 production forecasts for Malaysia, with the view that it will decline by a steep 12% year-on-year (yoy), compared with a 1% growth forecast previously, as disruptions are already apparent.
“Year-to-date production (October-February) is down 19.9% yoy and the Q220 outlook is challenging. The state of Sabah in Malaysia ordered the suspension of palm oil operations for several weeks in March and April in six districts after estate workers tested positive for Covid-19. This will represent a key dent to palm oil production in the country,” it said.
The research unit said that the decline in palm oil consumption will come through several channels.
Firstly, demand in the food and hospitality industry in key Asian markets will drop as a large number of consumers will stay home under the implementation of movement control/confinement measures to contain the spread of the virus.
“Second, economic growth will definitely be negatively impacted by the outbreak and our country risk team is currently revising down 2020 GDP growth forecasts across the board,” it said.
At the same time, the collapse in Brent oil prices in 1Q20 will constrain biodiesel production and consumption in Indonesia and Malaysia, despite the support programmes to the sector in place in those countries.
“Moreover, containment measures are disrupting global trade and the normal flow of palm oil exports to key markets as they are creating logistical interruptions and disrupting transport and port operations. This will limit import demand, in particular in times of lockdown,” it said.
For the long term outlook, Fitch Solutions has maintained its view for palm oil prices to average RM2,300/tonnes in 2020, which compares to 1Q20 average of RM2,626/tonne. However, in 2021, prices are expected to be stronger and average around RM2,400/tonne as demand recovers
“In the longer term, prices will trend only slightly upward as biodiesel use will keep consumption growth supported, while production is facing increasing headwinds with both Indonesia and Malaysia willing to freeze new plantations.”
The research unit ealso xpects that demand from India will remain on an uptrend, noting that large sources of growth for consumption are concentrated in a very limited number of markets, which makes the demand story vulnerable to change should the biodiesel or Indian oilseed market context turn.
It estimated that production will continue to grow in the coming years, but at a slower pace.
Although palm oil prices could receive a temporary boost from weather-related global oilseed production disruptions, or a cyclical tightening of the soybean market, Fitch Solutions believe the global supply for oilseeds and palm oil under normal weather conditions will be ample.
“This means that palm oil prices will remain relatively subdued on a five-year horizon under average growing conditions,” it said.