Global palm oil markets to remain firm in 1H 2022

By Leela Landress Perez

The global palm oil market has maintained elevated levels since prices began their ascent in June 2020 and despite recent record highs in January this year, the trend does not look likely to see much relief in the first half of 2022.

Palm oil volatility has surged since the beginning of the Covid-19 pandemic, with prices hitting record highs in January 2022, showing little hope of a softening trend as ongoing labour shortages in Malaysia, adverse weather, and unexpected policy changes in Indonesia continue to boost prices across the palm complex.

Global vegetable oil supplies have fallen during the Covid-19 pandemic despite a slowed demand growth rate. The tighter supplies have hit the largest volume vegetable oil on the globe, palm oil, markets hard.

Palm oil production is forecast to see some recovery in 2022 but prices are expected to remain elevated as output gains might struggle to keep pace with demand increases, especially as pandemic restrictions ease.

Weather and continued Malaysia labour issues have led to slower growth in palm oil production in 2021 and into early 2022, further straining inventories. Palm oil supplies relative to demand are seen as thin and a comfortable restoration of stocks could be at least a couple of cycles away.

Benchmark Malaysian palm oil futures hit lifetime highs at the end of January 2022, closing 62pc higher than at the end of January 2021, and more than double the end-January 2020 price.

Near term palm oil availability has worsened as the world’s largest producer, Indonesia, recently announced mandatory domestic sales to control prices, effectively curbing shipments and sending futures even higher.

Most of the world’s palm oil production, about 84pc, occurs in Indonesia and Malaysia, but the region is subject to disruptive tropical weather patterns.

La Niña has dominated the weather pattern for over a year. It often brings helpful rains to palm areas, but excessive rains seen in the last few months have curbed production.

The La Niña phenomenon is the reverse of the El Niño, where cooler waters develop over the Eastern Tropical Pacific Ocean along the coast of South America. In southeast Asia, higher than normal rainfalls tend to occur during a La Niña episode, which may result in an increased occurrence of floods.

Weather has not been the only problem for palm production as the Covid-19 pandemic has exacerbated the long-standing Malaysia labour shortage and slowed productivity. Producers in the region have said that there is a shortage of more than 75,000 workers, resulting in a potential 20-30pc hit to palm oil production.

Output slipped in 2019-2020 and again a year later, although harvests are forecast to recover in 2022.

Top producers, Indonesia and Malaysia, are expected to see production growth for the first time in three years in 2022. Indonesia's 2022 production is pegged at 49m t, up by 4.5pc from an estimated 46.89m t last year. Malaysia's production is forecast at 18.8m t, up by 3.9pc from 18.1m t in 2021.


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