CIMB Investment Bank's Ng said El Nino remains to be a key wild card for CPO price in 2024 and its impact on palm oil yield will only come through in 10 to 12 months.
KUALA LUMPUR: Palm oil industry experts remain optimistic for a recovery in crude palm oil (CPO) prices, which are expected to surpass the RM4,000 per tonne mark in 2024.
This was despite the commodity’s downward price trend during most part of 2023.
Key factors influencing CPO prices in the near future include the El Nino phenomenon, rising biodiesel demand, robust crude oil prices and the pricing of sunflower oil, say industry experts at the Malaysian Palm Oil Board’s International Palm Oil Congress and Exhibition 2023 (Pipoc 2023), which ended yesterday.
For the first 10 months of 2023, the average CPO prices saw a drop of 23% year-on-year (y-o-y) to RM3,835 per tonne compared with RM5,352 per tonne in the same period a year ago.
For the third quarter of 2023, CPO price declined by 4.6% y-o-y and 1% quarter-on-quarter to RM3,811 per tonne.
According to CIMB Investment Bank Bhd plantation analyst Ivy Ng, one of the key factors that contributed to the weaker CPO price, which was lower than what the market was expecting at the start the year, was the competition from other edible oils.
This resulted in local palm oil exports coming off in the first nine months of the year compared with the previous year.
“The decline in prices is generally expected, simply because last year we had some exceptional events in the form of the Russia-Ukraine war as well as the ban in palm oil exports by Indonesia.
“I think people may not have expected the decline to be as steep as what we are witnessing so far this year.
“For 2023, CPO price is averaging at about RM3,875. This indicates that towards the end of the year, CPO prices are hovering between RM3,800 and RM3,900 per tonne,” she said in a presentation at Pipoc 2023.
Ng said El Nino remains to be a key wild card for CPO price in 2024 and its impact on palm oil yield will only come through in 10 to 12 months.
The National Oceanic and Atmospheric Administration’s Climate Prediction Centre confirmed that El Nino conditions were present on June 8 this year.
“If you notice, every time the index indication of El Nino is made in the past, the palm oil yield actually falls. However, yield only falls a year later, so the impact of El Nino is delayed by about one year.
“As such, in order to track the impact of this particular El Nino, which has just been declared in the second and third quarter of this year, we have to look at the yield in 2024,” she said.
Moreover, Ng said evidence and historical data reveals that El Nino typically leads to higher CPO prices.
She said given that the impact of El Nino has not been seen yet, the market has been quite complacent. The first sign of impact from the El Nino is expected to occur during the second half of 2024.
“We need to keep in mind that there are ageing estates and we have not been planting a lot of new areas. There is also evidence of lower fertiliser input in 2022, along with ongoing climate change that could impact rainfall patterns.
“Hence, going into 2024, if El Nino suddenly causes adverse weather conditions and there is a severe decline in yield, we do not have any buffer from, say, young estates or new investment and so forth to counter that.
“So we should not be underestimating the potential impact of this coming El Nino,” she said.
Ng said other factors that could drive CPO prices next year are biodiesel demand and strong crude oil prices.
“Indonesia has adopted B35. We think that will likely increase the demand for biodiesel in Indonesia and therefore for palm oil, going into 2024, we think there should be at least one million tonnes of additional usage should the full implementation of B35 occurs.
“Crude oil price will stay high because of geopolitical risks and potentially because prices for oilseed are lower this year. This could mean that farmers may not be incentivised to plant a lot more going into 2024.”
Ng expects global edible oil stock usage to decline in 2024.
She expects global edible oil stock and usage to decline from 14.4% to 13.8% and, therefore, prices are projected to move up from RM3,870 to RM4,100 per tonne.
“We see production for palm oil to be quite flattish. We are looking at price forecasts of about RM4,100 per tonne for 2024.
“The key factors that could change our price forecasts include weather development, government regulation, what happens with the war as well as the economy,” she said.
Meanwhile, Palm Oil Analytics (Fastmarkets) managing director Dr Sathia Varqa said all edible oils, including palm oil and sunflower oil, saw a reduction in prices from the beginning of 2023 until now, by about 18% to 20%.
Palm oil has not been the cheapest oil for some parts of the year and was trading at a premium to rapeseed oil in certain months.
This shows that there is a lot of competition from other oils that is affecting the demand for palm oil.
“Hence, palm oil does not move in isolation and moves in tandem with other oils. But one oil that has really been a drag on palm oil was sunflower oil.
“The increasing flow of sunflower oil out of the Black Sea into countries like India and the Middle East saw a lot of pressure coming on the CPO prices and the cash market prices,” he said in his presentation.
Sathia said sunflower oil prices declined sharply due to high sunflower seed stock in Russia and on the assumption of trade from the Black Sea from Ukrainian ports.
He said the Ukrainian sunflower seed production is expected to do better in 2023/2024, which means export projections may surpass the pre-war levels.
“One reason for this is because of the excess buildup of seeds during the war, which means many were not able to crush the seeds, so the stocks built up.
“Despite the cancellation or non-renewal of the Black Sea Grain Initiative Agreement, the Ukrainian crushers have been crushing more and more seeds in order to get the oil out to the market.
“So this is an interesting development that we have to watch, where the Ukrainian government and crushers have defied expectations that sunflower oil will be eliminated or reduced. In fact, the opposite is happening,” he said.
Nevertheless, Sathia said sunflower oil prices cannot continue to fall because it will stop crushing activities. Prices will have to increase in order for crushing activities to continue.
“We are hearing from our colleagues in Ukraine that Ukranians are holding back the seeds. They do not want to sell or crush them because of the low prices; margins are too low and they are waiting for prices to recover before making them available for sale,” he said.
Sathia said CPO prices this year will most likely average at about RM3,800 per tonne, which is considerably lower than last year, which recorded historic high prices.
He expects CPO prices to build on the recovery into the first quarter of 2024, trading to a high of RM4,000 to RM4,200 per tonne.
“Palm prices are facing downward pressure now but are expected to make a recovery in trading at RM3,700 to RM3,900 per tonne on the CPO futures active month.
“’This year, prices are down by 25% to 30% on a year-to-date basis.
“So, we will not be surprised to see yet another quarter and full-year financial performance from plantations at a lower level compared with last year,” he said.
