Palm oil to have best year since 2011 Supply squeeze
Palm oil prices are set to have their best annual showing in a decade even as the coronavirus pandemic rages on.
Benchmark futures for the tropical oil, used in everything from cooking oil to shampoo, will average 3,200 ringgit ($791) a tonne in 2021, the highest in a decade, according to the median of 23 estimates in a Bloomberg survey of analysts, traders and plantation executives, versus 2,700 ringgit last year.
A bullish cocktail of La Nina-linked flooding and shrinking inventories in Malaysia is bolstering the market, but prices may come under pressure in the second half as production of palm, as well as soybean oil, rebounds.
"With lower production and the lowest stockpiles in years, crude palm oil prices are expected to stay elevated up to the middle of February, but to ease thereafter as production begins to recover and stocks grow from March onwards," said Sathia Varqa, owner of Palm Oil Analytics in Singapore.
Prices will average 3,650 ringgit in the first quarter, before easing to 3,400 ringgit in the second, according to the survey. Estimates ranged from 3,0004,150 ringgit for the first quarter, and from 2,5004,280 ringgit in the second. What's in store for palm? Veteran analyst Dorab Mistry predicts "explosive price moves" in the first quarter, but overall, 2021 will be a "year of two halves". Here's what the industry is watching:
La Nina: La Nina is wreaking havoc across the world, unleashing heavy rains in Southeast Asia that's led to flooding in second-largest grower Malaysia, and parching soybean crops in South America. Sunflower oil exports have also slumped from Russia and Ukraine. This will tighten supplies of edible oils around the world.
Rainy weather, however, may pave way for palm oil production to rebound in the second half of the year. James Fry, chairman of LMC International, forecasts combined production in Indonesia and Malaysia to expand by 5.5 million tonnes this year.
Biofuel blues: Indonesia's B30 programme will be a crucial make-or-break driver for palm's rally. The
Source: Malaysian Palm Oil Board — Bloomberg
ambitious mandate, which stipulates that fossil fuels must be blended with 30 per cent palm oil, could soak up bulging supplies in the top grower. But palm's premium over petrol has ballooned to the widest in at least two decades, which puts the programme under pressure. Oil World's Thomas Mielke called the B30 mandate a "swing factor," and said it could be temporarily reduced in March or April.
Production, labor shortage: Weaker-thanexpected yields and a chronic labour crunch has not only curbed Malaysian production, it's also hurting plantation stocks. What's more, floods in keygrowing areas could further cut monthly production and drive down stockpiles that are already at their lowest in 13 years.
"Production growth will remain a challenge in the first quarter due to severe localised flooding in December and into the first week of January," said Varqa from Palm Oil Analytics. In addition, a "shortage of workers from border closures and the existing moratorium on hiring of new foreign workers is likely to combine to hamper harvesting work and weigh down production."
Pandemic risks: Despite enthusiasm surrounding a vaccine, the coronavirus may still play a hand in palm oil's fortunes this year. A resurgence in new cases, for instance, could shutter cities and stifle any recovery in food demand from hotels and restaurants.
Demand watch: Appetite for palm oil will be closely watched this year, especially in biggest consumers India and China. Palm's recent rally has taken a toll on shipments to price-sensitive India and may face further headwinds from the growth of its domestic oilseed crops. Still, if palm exports stay robust, prices could reach 4,000 ringgit.