Price Rebound in November Short-Lived Malaysian benchmark crude palm oil (CPO) spot prices have declined to below USD800 per tonne (t) again in December 2023, after gaining strength in November on market concerns that the El Nino climate pattern will have a major impact on global vegetable oil supply.
Fitch in its analysis of the palm oil market said it expects CPO prices to average USD650/t in 2024, much lower than around USD840/t in 2023, on higher supply. Global climate patterns, which affect rainfall in key plantation regions, transitioned in 2023, creating favourable conditions for output growth. The latest rainfall trend and climate forecasts suggest that conditions would not deteriorate materially next year.
Higher Vegetable Oil Output in 2023-24
The United States Department of Agriculture (USDA) forecasts global production of major vegetable oils to increase by 3% in the 2023-24 marketing year (MY24), driven by growth in soybean oil and palm oil output. This follows a 5% jump in output in MY23. Palm oil production in Indonesia and Malaysia rose by around 8% in 1H23, and we expect the trend of higher output to continue at least until 1H24. Labour availability in Malaysia is close to normalisation. Latest data for Indonesia shows a yoy drop in output in August and September, but the ratings agency thinks it was a blip due to dry weather and production will rise in the coming months.
The supply of soybean oil, palm oil’s main competitor in the vegetable oil market, is forecast to surge next year by the USDA due to a jump in soybean output in Argentina and southern Brazil. Brazil, the world’s largest soybean producer, is likely to have a record crop, according to the country’s crop agency CONAB.
El Nino Likely to be Short but Strong
The market sees risk of a large drop in palm oil output due to the ongoing El Nino climate pattern, which causes drier weather in Indonesia and Malaysia. However, Fitch thinks the impact is unlikely to be material based on substantial rainfall seen in the region over the last month, and the forecast by the US weather service of a 60% chance of dissipation of El Nino conditions by June 2024.
Nonetheless, meteorologists see risk of a very strong El Nino in the next few months, which may lead to flooding-related disruptions to soybean output in South America, and support CPO prices.
Long-Term Output Growth Potential in India
India’s CPO supply may increase over the long term, backed by government plans to encourage the sector and reduce imports. Sime Darby Plantation Berhad (SDP, BBB/Stable) entered into an agreement in September 2023 to supply 1.3 million seeds to India in 2024 and set up a seed production unit in the country later. However, inadequate milling capacity, and road and irrigation infrastructure could hamper government plans for rapid growth in cultivated area and CPO output by 2030.
