Research firm foresees palm oil sector hit by decreased demand, price

CORONAVIRUS | The palm oil sector will be greatly impacted by the ongoing Covid-19 pandemic as prices are predicted to decrease, along with reduced demand, said Fitch Solutions Country Risk and Industry Research.

The research firm in its report today said palm oil prices are expected to decrease slightly from current levels of RM2,626 per tonne in the first quarter of 2020 to an average of RM2,300 per tonne over the coming months.

"Although palm oil supply is being negatively impacted by government containment measures as plantation operations are being disrupted, we believe demand destruction will be greater and send prices lower," said the research firm.

"We forecast prices to be stronger in 2021 and average RM2,400 per tonne as demand recovers," it said.

Within the next three to six months, Fitch Solutions identified a significant decrease in demand for palm oil from the food and hospitality industry in key Asian markets, as a large number of consumers will stay home under the implementation of movement control or confinement measures to contain the spread of the virus.

"Our global team estimates that over 80 percent of global GDP is now subject to some form of containment measure.

"For example, India will see significantly lower imports in March and April 2020 as the country is in the middle of a strict three-week confinement.

"Hurdles to trade are likely to continue even after India lifts the lockdown as Malaysia and Indonesia will then most likely have some form of confinement measures in place," said Fitch Solutions.

On a larger scale, the research firm said consumers' purchasing power is also likely to decrease as a revised GDP global growth forecast is currently estimated to come in at 0.5 percent to -1.5 percent.

It also cited the collapse in Brent oil prices as a factor that would constrain biodiesel production and consumption in Indonesia and Malaysia despite the support programmes to the sector in place in the countries.

In the longer term, it has been projected that prices will trend only slightly upward as biodiesel use will keep consumption growth supported, while production is facing increasing challenges with both Indonesia and Malaysia willing to freeze new plantations.

"We note that large sources of growth for consumption are concentrated in a very limited number of markets, which makes the demand story vulnerable to change should the biodiesel or Indian oilseed market context turn," said Fitch Solutions.

In terms of prices, the research firm projected that palm oil prices will remain relatively subdued over the next five years, up to only RM2,520 per tonne by the year 2024.

On average, Malaysia exports about 20 million tonnes of crude palm oil.

Primary Industries and Commodities Minister Mohd Khairuddin Aman Razali recently said that Malaysian palm oil is still in high demand in the food and energy industries in China, India and Europe.

Among others, he reportedly said that in China, palm oil is a major ingredient in the making of instant noodles and pre-packed food.

Malaysia's total palm oil stocks fell by 4.2 percent to 1.68 million tonnes in February 2020 from 1.76 million tonnes in January 2020. - Mkini