Palm oil futures will fall further next year than investors are factoring in, Fitch Solutions said, as it cut its price forecasts, citing the recovery in Malaysia’s ringgit and worsened world economic prospects.
The analysis group cut by 200 ringgit per tonne, to 3,800 ringgit per tonne, its forecast for the average Kuala Lumpur palm oil futures price in 2023, a level which would be the lowest in three years.
The forecast remained above the 3,600 ringgit per tonne that analysts are expecting, according to a Bloomberg poll, but falls short of the levels closer to 4,000 ringgit per tonne that investors are factoring in.
The futures curve does not suggest prices approaching 3,800 ringgit per tonne until May 2024.
The downgrade reflected a forecast for a “loosening in the global edible oils market brought about by weaker prospects for global demand”, Fitch said.
For palm oil itself, the group forecast a world production surplus of 1.6m tonnes for the season, lifting stocks to 17.4m tonnes, their highest in at least seven years.
“Palm oil demand remains sensitive to broader economic conditions,” Fitch said, with the edible oil largely used by foodservice groups, as well as in making biodiesel.
“Thus, consumption levels are highly sensitive to the reimposition of Covid-related lockdowns and other social restrictions, particularly in Mainland China, a major import market.”
Nonetheless, Fitch forecast prices staying above the average of 2,614 ringgit per tonne recorded for 2018-20, before the run up in values to this year’s record high, “reflecting our view that global markets will remain relatively tight in recent historical terms”.
Indeed, “we anticipate that palm oil prices will find some support through 2023, keeping levels above recent historical averages, on account of two supply-side factors”.
The first of these was a downgrade to 18.8m tonnes in forecast for palm oil output in Malaysia, the second-ranked producer, after Indonesia, to account for the impact of elevated fertiliser prices on application rates and the onset of storm conditions, which are expected to continue into the first quarter of 2023”.
The ongoing La Nina weather pattern tends to bring excessive rains to many parts of South East Asia.
‘Floor under prices’
The second was an expectation that the war in Ukraine “will continue through 2023, which will in turn continue to weigh on agricultural production”, including the country’s output of sunflower oil, a big rival to palm oil in demand terms.
“The net result of these two factors is that while we expect the global edible oils market to loosen in 2023, we also expect tightness to remain elevated,” Fitch said.
This will put “a floor under palm oil prices, in spite of a weaker demand outlook”.
For 2022 as well, Fitch cut its forecast for the year-average price by 320 ringgit per tonne to 4,880 ringgit per tonne, citing the recovery in the Malaysian ringgit, which stood at 4.57 per $1 on Wednesday, compared with nearly 4.75 per $1 two weeks ago.
“We highlight that the recent appreciation of the Malaysian ringgit will trim palm oil import demand, in turn weighing on price growth through the end of 2022.”
A stronger ringgit, which has been supported by stronger-than-expected Malaysian economic growth in the July-to-September quarter, curtails the affordability of Malaysian exports to buyers in other currencies.
Fitch’s forecast factors in a view of the “average palm oil price hovering around 4,000 ringgit per tonne through the remainder of 2022” on a benchmark contract basis, a little below levels currently being factored in.
The benchmark March 2023 lot closed on Wednesday up 2.5% at 4,105 ringgit per tonne.