Crude palm oil (CPO) prices have been on a steady climb since early May, and the edible oil is poised to post the highest year-end closing in 25 years, if not longer.
According to Bloomberg, generic three-month palm oil futures (expiring on Dec 31) are currently trading RM48 higher at RM3,854 a tonne, a 25-year high.
In contrast, the same contract stood at RM3,041 at the end of 2019, and RM2,004 at the end of 2018. And the current price level is a far cry from the RM732 registered at the end of 2000.
This price momentum is also evident in spot prices for the edible oil. According to the Malaysian Palm Oil Board (MPOB), as of Dec 23, the price stood at RM3,701 a tonne — constituting a nine-year high. To put this into context, the last time spot prices for CPO were in this territory was in January 2011.
CPO prices have been rising in a macroeconomic environment that is still suffering and negotiating with a global pandemic — which has impacted both demand and production. It has also paralysed key consumers of CPO such as the hotel, restaurant and conference (HoReCa) sector.
Due to pandemic fears, the CPO prices plunged in the first four months, but the prices bounced back strongly soon after that.
Analysts said the currently elevated CPO prices are a result of tight supply-demand dynamics. Indeed, Malaysia's end-month CPO stocks have reached new lows.
In a note on Dec 11, CGS-CIMB Research's Ivy Ng and Nagual Ravi said Malaysia's palm oil stock fell by 1% month-on-month (m-o-m) and 31% year-on-year to 1.57 million tonnes as at the end of November, which is the lowest stock level for the month of November since 2004.
The duo noted that the declining trend is divergent from its 10-year historical trend, for which inventory rose by an average of 3.5% m-o-m in November.
"The stock level was 2% above our forecast of 1.53 million tonnes (as per their earlier note on Dec 2) due mainly to higher-than-expected imports. The stock is also 1% and 2% above Bloomberg consensus and Reuters' poll estimates, respectively.
"Stockpile remains low compared to historical levels; the average palm oil stock level in Malaysia at end-November for the past 10 years has been around 2.3 million tonnes. The tight palm oil stockpile level and Indonesia's revised export levy will likely continue to support CPO prices," the analysts noted.
In fact, CGS-CIMB Research expects palm oil stocks to fall by 6% m-o-m to 1.48 million tonnes at the end of December, with output down by 10% and exports flattish. At the time, CGS-CIMB expects CPO prices to average at RM2,680 a tonne (from RM2,620) in view of the stronger-than-expected CPO prices achieved in November. For December, it expects CPO prices to trade in the range of RM3,000 to RM3,500 a tonne in December.
In a note yesterday, PublicInvest Research's Chong Hoe Leong said palm oil importers will rush for more imports from Malaysia ahead of the resumption of export duties in view of the current savings.
"For the Dec 1-20 period, Malaysian palm oil exports rose 12% m-o-m as shipments to India and EU rose 57% and 17%, respectively," he noted.
The government is resuming CPO export taxes at 8% in January 2021, with the gazetted CPO price for such taxes set at RM3,475 a tonne.
MIDF Research, in its 2021 outlook on the plantation sector, noted that the current labour shortage, which has been heightened by the movement restrictions following Covid-19, has been one of the reasons for lower productivity in 2020.
Not to mention, the La Niña weather pattern (higher rainfall in Southeast Asia) has also had an impact in terms of harvesting activities as a result of flooding on oil palm estates. On the whole, the research house is of the view that palm oil prices will remain elevated in 2021, as a combination of a moderation in CPO production growth, resilient export demand to China and India, and higher domestic consumption from both Indonesia and Malaysia through higher biodiesel mandates and higher prices of competing vegoils will maintain the tight supply-demand dynamics.
"All factors considered, we are maintaining our 'neutral' recommendation on the sector with a CPO target price of RM2,700 per tonne in 2021," MIDF noted.