Fitch expects crude palm oil (CPO) prices to range from USD 700 to USD 800 per tonne in the next 12 to 18 months; a moderate increase from the August 2014 price range of USD 650 to USD 750 per tonne.
Crude oil and CPO prices have historically exhibited a high correlation. Hence, the military conflict in Iraq may result in higher crude oil prices, which coupled with meteorologists' prediction of a 70% probability of an El Nino weather pattern in H214, may exert upward pressure on CPO prices.
On the other hand, counteracting factors against rising CPO prices include a bumper soybean crop in the USA that has resulted in lower CPO exports to China, along with a narrowing in the differential between soybean oil and CPO prices. Delays in the implementation of policies favouring higher CPO content in bio-diesel in Malaysia and Indonesia are also catalysts against an increase in CPO prices. Malaysia has postponed the nationwide implementation of its B5-biodiesel policy by two months to September 2014. Indonesia's bio-diesel policy has also failed to meet its targets. The stumbling block for both countries is the lack of supporting infrastructure and logistics issues, especially for Indonesia, which is an archipelago.
Despite the absence of a near-term impetus for a price increase, the credit profiles of the key Malaysian and Indonesian producers is stable, supported by favourable operating cost structures, plantation maturity profiles, and steady demand for palm oil. Large CPO operators have absorbed employee cost increases and continue to generate robust operating cash flows.
Comfortable liquidity, low land bank availability in Malaysia and the availability of relatively inexpensive oil palm plantations and refineries overseas has prompted Malaysian companies to invest in core and allied businesses overseas. While Indonesia-based producers' expansion plans are still largely focused on land bank acquisitions and downstream integration. In the long run, increases in refining capacity in Indonesia will make refiners with limited ownership of plantations become less competitive than more integrated companies.
