Fitch foresees ‘modest’ rise in palm oil price

(Agrimoney) – Fitch Ratings forecast only a small revival in palm oil prices despite the potential for boosts from Iraq conflict and the El Nino weather pattern, in a briefing which cautioned Indonesian refiners to snap up plantations.

The credit rating agency highlighted the potential for unrest in Iraq, as an oil-producing state, to support prices of palm oil which, as a biodiesel feedstock sees its values strongly influenced by those of crude.

“The military conflict in Iraq and concerns about disruptions in oil field operations in the country could result in an increase in crude oil prices and thus provide a fillip to crude palm oil prices,” Fitch said.

Further support to prices from the prospect of an El Nino off weather pattern which many meteorologists see as in the offing, and which typically causes dryness in the main South East Asian palm oil-producing countries.

“Historically a severe El Niño would result in a 10% to 15% drop in crude palm oil output and a 30-40% increase in average selling price,” Fitch said.

“An El Niño coupled with continued military conflict in Iraq would exercise upward pressure on crude palm oil prices.”

Downward price pressures

However, Fitch forecast that palm oil prices will nonetheless “increase only modestly” over the next 12-18 months from their recent, downbeat range of $650-750 a tonne.

The group highlighted the depressant effect of the prospect of a record US harvest of soybeans, the source of rival vegetable oil soyoil, which has “resulted in lower lower palm oil exports to China”, besides narrowing the historic discount of palm oil to soyoil.

Furthermore, Indonesian efforts to boost use of palm oil in making biofuel have missed expectations, with officials expecting an 18% shortfall in biodiesel blending from a 2014 target of 1.644bn litres.

“The resultant higher crude palm oil stocks will have a negative impact on prices.”

The agency forecast a “medium-term average crude palm oil price of $700-800 per tonne to reflect the supply/demand fundamentals”.

Caution to refiners

The comments came as palm oil futures showed a strong revival in Kuala Lumpur’s futures market, closing up 2.6% at 2,030 ringgit a tonne for November delivery.

The contract on Tuesday touched 1,914 ringgit a tonne, the lowest for a benchmark contract in five years.

And they came in a report in which Fitch highlighted the danger to the Indonesian palm refining industry from a ramp up in capacity which has this year along seen Astra Agro lift capacity by 700,000 tonnes.

“The industry has never seen such a high growth in refining capacity since palm oil cultivation was introduced in the 1980s,” the agency said, warning that processors needed to secure a supply of palm oil to ensure they run at sufficient rates to bolster profitability.

“In the long run, we view integrated producers with both upstream and downstream capacity as better equipped to meet intensified competition, as refining capacity growth outpaces crude palm oil production.”

Fitch was less concerned over Malaysian refinery expansion, even though expansions have reduced the industry’s capacity utilisation rate below 70%, from 89% four years ago.

“Current capacity utilisation level is still adequate to support integrated crude palm oil operators’ credit profiles.”