Strong Prices Sustained but Outlook Weak
Malaysian benchmark crude palm oil (CPO) spot prices rose quickly to USD1,100/tonne (t) in July 2021 and have remained around that level, after falling below USD900/t in June, due mainly to sustained labour shortage and weak output in Malaysia.
Fitch Ratings expects prices to average USD1,000/t in 2021, a similar level to the year-to-date average, factoring in a gradual decline from 4Q21. Indonesia’s palm oil production has improved in 2021, in contrast to weaker Malaysian output, and is expected for the trend to continue in 2022. The view is that current prices are unsustainable is also supported by factors such as Malaysia planning to permit foreign workers into the country to ease the labour shortage and the decline in soybean oil prices since August 2021.
However, the pace of price declines will depend on how soon the Malaysian labour shortage ends and output rebounds, as well as the price trajectory of competing oils such as soybean oil. Market expectations for soybean prices indicate further decline over the next year, but sustained dry weather in key producing regions in South America due to La Nina’s return later this year is a key risk. Output Rises in Indonesia, Lags in Malaysia Palm oil production in Indonesia jumped by 6.7% in 2Q21, gathering pace from the 1.5% growth seen in 1Q21, due to improved rainfall since 2020.
Output in 3Q21 is likely to be slightly affected by heavy rainfall and flooding in Kalimantan, which disrupted harvesting activities, but expect production growth to continue into 2022.
