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Can palm oil prices keep up their sizzling performance in 2020?


Palm oil prices staged a remarkably strong close to 2019.


Kuala Lumpur futures in the vegetable oil proved unexciting for much of the year, ending September little changed from where they began it.


However, they have soared more than 40% since then, spurred by a growing realisation that South East Asian countries will make good on longstanding efforts to boost demand for biodiesel, which is made from vegetable oils. (Ie palm oil in Indonesia and Malaysia.)


Furthermore, Chinese imports have been boosted as a knock-on effect of African swine fever (which in cutting demand for meal has depressed the domestic crush and so output of vegetable oils too).


And this at a time when South East Asian output is under pressure from factors ranging from a hangover from the previous period of low prices, which undermined fertilizer use, to consumer pressure for sustainable supplies.


Are these forces sufficient to ensure prices continue their rally in 2020? Leading commentators give their outlooks.


The Fitch Ratings section was revised on January 3 to include some updated comments.


Fitch Ratings


Malaysian benchmark crude palm oil (CPO) prices have jumped to around $700 per tonne since October after remaining below $500 per tonne for most of the year.


However, the average for 2019 of around $510 per tonne is lower than the $555 per tonne in 2018.


We assume prices will average $550 per tonne in 2020.


Strong prices could continue into early 2020, but we expect a moderation later in the year due to higher supply, driven by better weather conditions and fertiliser input.


Indonesia is targeting a 45% jump in the consumption of biodiesel made from CPO in 2020 to 9.6m kilolitres.


However, we think a sustained CPO price rise may discourage the government from pursuing its target aggressively as it will eliminate the discount to regular diesel prices.


The sharp rally in CPO prices has also reduced its attractiveness via-a-vis competing edible oils such as soyoil, which could affect demand from price-sensitive markets such as India.




Palm oil prices skyrocketed in recent weeks, as top producers Indonesia and Malaysia increased palm bio-diesel content in their domestic fuel, amid an already tight market, while surging oilseed prices–a substitute good—also supported prices.


In 2020, prices should ease but remain elevated as stronger biodiesel demand in Asia partially offsets declining consumption in Europe.


Our panel projects prices to average $640 per tonne in the fourth quarter of 2020 and $670 per tonne in the fourth quarter of 2021.




Dorab Mistry, Godrej International

China has turned out to be a star for palm oil in 2019 and will continue to be so in 2020.


After this winter, in 2020, China may not import palm biodiesel due to uncompetitive pricing.


However, palm imports will expand due to edible and industrial demand. Palm and sunflower oil will replace soyoil.


Low or no fertiliser application in the first half of 2019 plus dry weather... and the lower planting of new areas will combine to give us [Indonesian] production growth of just 1m tonnes.




James Fry, LMC International

We have seen the repercussions from the relentless pressure from NGOs to stop oil palm planting.


This is on top of the normal slowdown in new plantings that occurs at times when prices are low.


These cutbacks will inevitably keep crude palm oil output growth low for the next few years and therefore help to reduce stocks and raise prices.




JP Morgan

Palm oil prices have led the gains across the agri commodity complex through the fourth quarter of 2019… and we see a sustained, albeit more moderate uptrend for prices over the medium term.


The counter-seasonal decline in Malaysian stocks through the fourth quarter, at a time of rapid growth in industrial demand and a decelerating production pipeline has finally caught the attention of end users, after a subdued trading range through 2019.


The recent explosion of prices to the long-anticipated inventory decline has been both more delayed, and abrupt than we had anticipated. We have long flagged the contractionary phase that global palm oil stocks entered in 2019-20, down 11% year on year to 9.3m tonnes (stocks-to-use ratio of 12%), from a peak of 17% in 2017-18.


Our 2020-21 preliminary balance points to the first production deficit in five years, drawing stocks to near 8m tonnes (stocks-to-use ratio at 10.5%).


Our 2020 forecast projections have increased across the curve to an average of 2,650 ringgit a tonne for the year





Global palm oil production in 2019-20 is forecast to increase by 2.7m tonnes, or 3.6% year on year, to 78.3m tonnes, on the back of production increases in Indonesia and Malaysia.


Palm oil production in Indonesia and Malaysia in 2020, however, could still be negatively affected by the lingering effects of dry weather that occurred in South East Asia in the second and third quarters of 2019.


Meanwhile, global palm oil demand is forecast to increase by 4.1m tonnes in 2019-20, or 5.7% year on year, to 76.7m tonnes. We forecast Indonesian domestic palm oil consumption to increase by 2.3m tonnes, or 18%, to 14.9m tonnes in 2019-20. This is a result of the implementation of the B30 mandate in Indonesia in 2020.


We forecast 2020 palm oil prices to increase by 10.7% over 2019, to an average of 2,500 ringgit a tonne in the second quarter of 2020.



VSA Capital


With the sharp increase in CPO pricing, the traditional premium of US soyoil over Malaysian palm oil has disappeared… with CPO trading at a slight premium to soyoil for the first time since February 2011, when palm oil was at its all-time high (about $1,300 per tonne in Rotterdam).


With Malaysian CPO now trading at a premium to US soyoil for the first time in almost nine years, the economics of biodiesel approaching the $100-per-tonne premium “trouble line” and concerns over exports, there are certainly several clouds on the horizon, which may prevent further price gains.


To me, this is now a question of political will, namely will the Indonesian government continue to push the biodiesel roll-out as hard in light of changing underlying economics.


Signs so far look good with talk about increasing to B40 in 2021-22 and up to B50 after that, but I believe this is the key factor to keep an eye on for 2020 in terms of palm oil price direction.


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