Crude palm oil (CPO) prices will struggle this year despite rising from recent lows in mid-December as the commodity's alternative fuel attraction dims on a gloomier outlook for crude oil.
Analysts said weaker demand for crude oil due to slower global economic growth would dampen CPO prices this year with Oversea-Chinese Banking Corp Ltd analyst Barnabas Gan observing that commodities most dependent on global growth like base metals and energy would exhibit bearish trends.
Analysts in a Bloomberg survey expect exports to drop when the Malaysian Palm Oil Board releases December data today.
However, they said supply constraints, soybean prices (CPO and soybean prices move in tandem) and a moderation of economic woes could mitigate downward pressures on CPO prices.
Gan added that based on past recessions, gold, livestock and grains were typically the most resilient in a global environment characterised by the eurozone debt concerns, high US unemployment and weaker growth in China.
“Palm oil as an alternative fuel may come under pressure as a looming economic slowdown weighs on crude oil prices. Our forecast for Brent oil prices to come under US$100 (RM315) per barrel, or about US$750 per tonne, may put pressure on current palm oil prices at US$943 per tonne on price competitiveness basis,” Gan said.
He said demand for palm oil as an ingredient for food, as well as possible supply disruptions, might provide support at US$800 per tonne with downside risks.
“Nevertheless, it is important to note that the weather will remain the biggest wild card in determining palm oil supply in Indonesia and Malaysia in 2012.
“The current La Nina episode is estimated to last till early 2012 and may continue to affect harvesting efforts,” Gan said.
He said due to erratic weather patterns, market expectations over palm oil supply for the year were mixed with domestic players in Indonesia and Malaysia expecting production levels to grow by as much as 6.5% year-on-year while some industry analysts expect production growth to turn slightly negative towards the second-half of the year.
Analysts at JP Morgan's Asia-Pacific equity research team said after factoring in prospects of a weaker economy, the base-case forecast for CPO was RM2,850 per tonne.
They said prices “could overshoot on the upside short term due to weather risk (La Nina) coinciding with the low output season for palm oil in the first quarter of 2012.”
“Amid the uncertain global outlook, supply constraints will continue to provide support to CPO prices palm oil global production growth expected to moderate to 4% in 2012 (9% in 2011) with reversal in the biological yield up-cycle, while global soybean supply is expected to fall 3.5% year-on-year in 2012,” they said, adding that risk to CPO forecast was on the upside as a sustained global recovery could lift assumptions to RM3,200 per tonne.