Palm oil prices are poised to “rebound strongly”, provided the coronavirus outbreak behind their sell-off is brought under wraps, Sipef said, underlining the weak prospects for world output of the vegetable oil.
Before the spread of the virus, palm oil prices were the subject of a “very compelling, friendly story” for 2020, with the need for demand rationing, in the face of strong demand by biodiesel plants, seen likely to exceed multi-year highs reached last month.
In early January, Kuala Lumpur palm oil futures set a three-year high, while an Oil World indicator of cash prices set a six-year top of $868 per tonne.
“Price levels needed to increase to cut demand, and probably needed to rise considerably above the recent highs,” Sipef said.
‘Very positive price environment’
And even though, following the coronavirus outbreak, “uncertainty has taken its toll” on prices - which Oil World reported at $778 per tonne as of Tuesday – Sipef said that “the expected price trend remains positive”.
“On paper there is little reason to believe it will impact the demand, albeit that temporarily there are some logistic hiccups,” the tea-to-bananas plantations group said.
“Provided that the coronavirus is controlled soon, it is expected that the market will rebound strongly.
“Once palm oil market fundamentals are back in control, Sipef still foresees a very positive price environment for 2020.”
The outlook reflects expectations that world palm oil output will see “no growth” this year, with the group foreseeing a drop of 0.5m-1.0m tonnes in volumes from Malaysia, the second-biggest producing county, and “limited growth at best” from top-ranked Indonesia.
The group cited for its forecast an expectation of a hangover on South East Asian output from dry weather, besides from weaker fertilizer applications by palm producers from mid-2018, as price weakness deterred investment in crops.
This effect “could even spill over into 2021”.
‘Very low stock situation’
Meanwhile, consumption is being spurred both by food needs, which have been expanding by about 3m tonnes a year, and demand from biodiesel plants, with Indonesia especially expected to see an acceleration in needs in 2020, thanks to the implementation of B30 – a mandated blend of 30% biodiesel in transport diesel.
Furthermore, in Indonesia, “there are already discussions ongoing regarding B40 for 2021 and even B100 in the upcoming years”.
This output and demand imbalance is coming at a time when 2019 has already brought a drawdown of 3m-4m tonnes in inventories, meaning “a very low stock situation in Malaysia and Indonesia”.
Sipef said that its own Indonesian palm plantations had shown “no improvement” in output in January, with volumes falling year on year in the North Sumatran operations, which had in 2019 suffered drier-than-normal conditions in the first and third quarters, and a “very wet” October and November.
“That said, the outlook is more favourable for the rest of the first year-half,” and for the full 2020 the group forecast “slightly positive production figures” for its Indonesian plantations overall.
While output was seen growing by 10% in the group’s Papua New Guinea division, that reflected recovery from rates depressed last year by the three volcanic eruptions, which landed stones of up to 6 inches and ash on plantations, and defoliated trees.
Sipef said its Papua New Guinea output would still come in 20% lower this year than in 2018.
The comments came as Sipef unveiled a loss of E8.00m for 2019, compared with earnings of E30.09m a year before, reflecting weakness in both the palm oil prices and the group’s own production, which fell by 11.2% year on year to 312,514 tonnes.
Revenues dropped 9.8% to E248.3m, reflecting too lower volumes of rubber and tea output, offset in part by a boost to sales from a recovery in banana production.
Sipef added that it had, in the face of the palm oil rally, accelerated its forward sales of the vegetable oil, having 36% sold already for 2020, at an average price of $727 per tonne.
A year before, it had sold forward 23% of expected 2019 production at an average of $584 per tonne.
Sipef shares stood 2.4% lower at E52.60 in midday trading in Brussels.