Malaysian benchmark crude palm oil (CPO) spot prices have declined to below USD800 per tonne (t) again in September 2023, after gaining strength in July on market concerns of a major impact of El Nino weather conditions on global vegetable oil supply.
Fitch Ratings expects prices to weaken to around USD750/t in 4Q23, averaging of around USD830/t for the year (2023YTD: USD865/t). Palm oil output has risen significantly this year, and we expect it to improve further in the next 9-12 months before a potentially strong El Nino starts to affect output. The global supply of other vegetable oils should also rise during this period. The rating agency thinks this may cause CPO prices to drop below USD650/t in 1H24.
Higher Vegetable Oil Output in 2023-2024
Global supply of major vegetable oils is forecast to grow by 3% in the 2023-2024 marketing year by the US Department of
Agriculture (USDA). This would follow a 4% rise in 2022-2023, after a flattish 2021-2022. Palm oil output growth is seen as the biggest driver of higher vegetable oil supply in 2023 and 2024, followed by competing oils from rapeseed, soybean and sunflower seed.
Palm oil production in Indonesia and Malaysia has jumped by 11% in 1H23, and Fitch expects the trend of higher output to continue at least until 1H24. Indonesia has led in terms of production growth, and expects yields in Malaysia to follow suit.
The number of foreign workers in Malaysia has grown steadily since 4Q22, and companies are imparting harvesting skills to new recruits to improve their productivity.
Strong El Nino a Key Upside Risk for Prices
Weather forecasters estimate a high likelihood of at least a “Strong” El Nino weather persisting until March 2024. Previous episodes of the weather pattern, which causes drier weather in Indonesia and Malaysia, have usually lasted for a year or more. Therefore, Fitch sees the risk of a strong El Nino persisting until at least end-2024.
A prolonged high-intensity El Nino is likely to depress oil palm yields and push CPO prices up, starting around 4Q24. Weather forecasts in the next few months should lend better visibility into 2H24 and beyond, and may brighten the price outlook for 2024-2025. The house currently assumes USD600/t for 2024, and USD650/t thereafter.
Potential Long-Term Alternative to Palm Oil
Researchers at a Scottish university have created a palm oil substitute made from ingredients such as rapeseed oil, which they claim is healthier and more environmentally friendly. The team has yet to demonstrate feasibility of commercial production and use. The product may not be widely adopted, but Fitch said it expects further research to reduce palm oil use to continue, especially in developed markets such as Europe. This dampens the long-term demand growth outlook for palm oil, and should keep prices in check.