CPO price to rise only modestly despite El Nino, Iraq: Fitch

The El Nino weather pattern brings extreme heat and drought, which will negatively impact production volumes and could raise average selling prices for CPO.

July 08, 2014 9:16 IST | India Infoline News Service
Fitch Ratings says that the global crude palm oil (CPO) price will increase only modestly despite the likely onset of the El Nino weather pattern this year and recent military action at Iraq. Fitch expects the narrowing price spread between CPO and soybean oil and the lack of growth in demand for biodiesel in Indonesia to restrain upward trends in CPO prices.

The El Nino weather pattern brings extreme heat and drought, which will negatively impact production volumes and could raise average selling prices for CPO. Meanwhile, recent military action in Iraq and concerns about disruptions to oil field operations in the country put upward pressure on crude oil prices, although supply concerns have since receded. Given the high correlation between CPO and crude oil prices, this could drive up CPO prices.

Climatologists estimate that an El Nino pattern may develop by September, a little later than the initial estimate for July-August. Between January and May 2014, average CPO prices increased by 5% from a year earlier, partly reflecting market anticipation of the El Nino pattern. Historically, a severe El Nino would result in a 10%-15% drop in CPO production volume, and a 30%-40% increase in average selling prices.

However, the upward pressures would likely be countered by the narrowing of the gap between the prices of soybean oil and CPO. Soybean oil is a substitute for CPO and a good harvest in major producer the US, which is forecast to export 1.75bn pounds of soybean oil in 2014, has pushed the price of soybean oil down, shrinking the premium over CPO prices to an average of USD 91/ton in January-May 2014 from USD 244/ton in 2013, according to data compiled by Bloomberg. This has encouraged higher consumption of soybean oil at the expense of CPO. For example, Indian soybean oil imports in May trebled from a year earlier while the country's imports of palm oil products fell by 17%, according to Oil World, an industry data provider.

In addition, Indonesia's demand for CPO for blending into biodiesel has not increased so far in 2014 compared with 2013. Although regulations requiring the use of palm oil in biodiesel are positive for the Indonesian CPO industry in the long term, the blending of CPO into biodiesel is hampered in the short term by underdeveloped distribution infrastructure and the high cost of CPO. As a result, higher CPO stocks are also weighing on selling prices.

In Fitch's view, an average CPO price of about USD800/ton (benchmark Belawan price at end-May 2014: USD848/ton) would reflect supply and demand fundamentals. Given the nature of oil palm plantations, a significant increase in supply over the next 24 months is unlikely. Similarly, a sharp rise in demand from the largest consumers, such as China, India, and Indonesia, is not anticipated.

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