Overview of the Global Palm Oil Sector in 2020 and Outlook for 2021

Over the years, the global production of oils and fats has risen steadily. Out of 17 oils and fats cultivated in the world, only 4 oils have a significant share in the production oils and fats which are palm oil, soybean oil, rapeseed oil and sunflower oil. These four major oils contributed about 76% from the global oils and fats production. In 2020, it is estimated that global oils and fats production will drop by 0.6 million MT or 0.26% to 235.7 million MT compared to 2019 figure. Palm oil is the major oil produced which accounted for 31.4% or 74.02 million MT from total oils and fats production globally in 2020.

Source: Oil World

The consumption of oils and fats is growing in tandem with the rising of the world population. The strong demand for the oils and fats driven by strong growth in the food and beverage, oleochemical and biodiesel sector. The sector has experienced strong growth due to strong GDP growth, rising per capita income, rapid urbanization and growing middle-class consumers in the major consumer countries.

Projected Production & Consumption

Source: Oil World / MPOC Estimates

Review of Malaysian palm oil in 2020 and Outlook for Palm oil Sector for 2021 and beyond

Palm oil is the most produced vegetable oil in the world and in 2020, palm oil production was initially expected to exceed 2019 production as both Indonesia and Malaysia, the two largest producers of palm oil were poised to lead the growth output. Unfortunately, the total palm oil output recorded a drop instead primarily due to the prolonged dryness experience especially in Indonesia, as well as the lack of fertilizer applications among the smallholders.

This situation was further exacerbated by the Covid-19 pandemic which curtailed production as both countries imposed strict movement control orders. This in turn hampered production as harvesting, processing and transportation activities were severely restricted and this reflected in lower production especially from March to May 2020. As a result, Malaysian palm oil production fell to 19.1 million MT, down by 300,000 MT from earlier forecast of 19.4 million MT. This in turn caused export supplies falling short of expectations which could not meet demand which is reflected in prices which rallied especially during the third and fourth quarters of 2020.

So far in 2021, palm oil production in January has not shown any signs of recovery primarily due to heavy rains and flooding which halted harvesting and processing activities. The re-imposition of MCO in mid-January will also impact production although palm oil industry is considered as an essential sector and activities are allowed to resume as normal. However, this is seen as a temporary setback as palm oil production in Malaysia is expected to recover from March onwards which is the peak production period of palm oil.

It is forecast that in 2021, Malaysian palm oil production will likely reach close to 20 million MT which will be contributed by the maturing oil palm areas that were replanted in 2018 as well as better FFB yields. The recent change in export tax structure in Indonesia which incentivize processed palm oil exports and make crude palm oil of Indonesian origin to be more costly will likely shift demand for CPO from Indonesia to Malaysia. As for prices, there was a consistent uptrend reaching an all-time high in mid-December 2020 and in the futures market, there was unusually high volatility in crude palm oil futures on the Bursa Malaysia Derivative. But as expected, the uptrend could not be sustained in 2021 but CPO price will in all likelihood still trade above RM3,200/MT.

Palm oil production

Global palm oil production in 2020 is estimated to decline by almost 2.7 million MT from a year earlier as the period between October and March are low yield months for palm oil. Although a recovery occurred in the third quarter of 2020, it could not compensate for the loss of production in first half of 2020. World consumption of palm oil suffered from the COVID-19 pandemic in India, China and many other countries, while higher soybean oil output due to the recovery of swine husbandry sector in China also led to lower demand for palm oil.

(‘000 T) 2016 2017 2018 2019 2020E 2021F
Opening Stock 13,527 10,652 13,105 15,264 14,022 12,842
Production 60,057 69,638 74,680 76,670 74,020 78,500
Import 44,828 50,299 51,426 55,409 51,100 54,800
Export 44,393 51,099 52,205 54,737 50,940 54,900
Consumption 63,368 66,385 71,743 78,584 75,360 78,900
Ending Stock 10,652 13,105 15,264 14,022 12,842 12,342

Source: Oil World

A moderate increase in CPO production in 2021 is expected but the rate of increase will be lower than previous years as the effects of Covid-19 pandemic carries on into 2021. A La Nina phenomenon is seen taking place in first quarter of 2021 which will bring heavy rainfall and flooding in some oil palm planting areas is bound to affect harvesting activities, which will subsequently lower the CPO output. The low beginning stocks of palm oil in 2021 will not be matched by production as demand for palm oil is expected to increase due to a combination of higher consumption requirements and the lower production of other oils such as rapeseed and sunflower oils.

Although there will be a growth in production in 2021, major challenges are ahead in Malaysia and Indonesia palm oil industry due to a combination of unfavourable weather and shortage of labour especially in Malaysia as output growth will be in slowdown. This will be further aggravated by the recently announced Movement Control Order imposed in many parts of Malaysia which indirectly affect palm oil planting and harvesting activities, on top of the bad weather condition mentioned earlier.  Furthermore, the limited expansion in planted area and also delay in replanting activities in both countries are expected to be other major factors leading to the slowdown in output growth.

Palm oil consumption

The expected increase in demand for oils and fats may not be met by other vegetable oils and the world will be dependent on large supplies of palm oil. If production is not improved we may see an uptrend in palm oil prices. Coupled with the Indonesian plans to continue with its B30 program in 2021, the market could see a shortage of palm oil available for food industry. Although it is expected that palm oil consumption in EU will decline slightly by 1.2 million MT due to a decline in palm oil use in food, it should not impact consumption of palm oil in other parts of the world. Demand for palm oil will also come from major palm oil consuming countries such as India, China, Pakistan, Africa and to a lesser extent Europe and the Americas.

India has very low palm oil opening stocks in 2021 and the recent reduction in palm oil import duties will result in higher demand for palm oil as even at current prices, it is still lower than all other competing oils. The recovery in economic activities in India, Pakistan and Africa despite the Covid-19 pandemic will be a major factor in the rise in demand. In Europe palm oil demand will stem from the biodiesel producers in order to meet their respective biodiesel mandates. Widening price discount between palm, sunflower and rapeseed oils coupled to projected shortfall in sunflower production by almost 2 million MT expected to help palm in this EU market. Sunflower oil as biodiesel feedstocks is forecast to reduce from 600,000 MT to only 100,000 MT in 2021. Palm will be challenged to fill this gap since European national mandates such as in France, Denmark are already poised to phase out palm biodiesel. 

Palm oil price

Malaysian CPO production in 2021 will likely increase only slightly by 300,000 MT to 19.4 million MT while exports is forecast to increase to 4.5 million MT leaving about 15.1 million MT for domestic refining. As a result, a CPO supply deficit of at least 500,000 MT and this supply & demand scenario is postulated to create low month ending stocks for much of 2021, with low monthly stocks trending below 1.5 million MT. This appears a classic scenario for higher CPO prices for most parts of 2021.

Over the past few weeks in December 2020 the FCPO+3 price of palm oil has been steadily climbing reaching a high of RM3,850/MT. The price of palm oil ended firm in December 2020 at RM3,621/MT and there were heavy trading activities for CPO in the BMD futures market. So far, in the first two weeks January 2021 CPO prices has been firm at an average of RM3,863/MT as concerns over supply has helped stabilize prices. For the first quarter of 2021, it is forecasted that palm oil price will range bound between RM3,500/MT to RM3,850/MT while for the rest of the year prices would likely ease but remain above RM3,300/MT as production of palm oil recovers in the second half of 2021.

Prepared by: Mohd. Izham Hassan , Rina Mariati  and Desmond Ng  

*Disclaimer: This document has been prepared based on information from sources believed to be reliable but we do not make any representations as to its accuracy. This document is for information only and opinion expressed may be subject to change without notice and we will not accept any responsibility and shall not be held responsible for any loss or damage arising from or in respect of any use or misuse or reliance on the contents. We reserve our right to delete or edit any information on this site at any time at our absolute discretion without giving any prior notice.

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