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Commodities 2022: Palm oil prices could retreat by H2 as low demand, higher production play on markets

Highlights

Omicron variant may slow down production recovery in Malaysia

Prices of nitrogen, phosphorus used in palm oil farming more than doubled in H2 2021

Indian importers seen preferring olein helped by policy intervention

High palm oil prices may spillover into 2022 on supply concerns but low demand from top buyers India and China combined with a narrowing price advantage over rival vegetable oils could cap its upside by the second half of the year.

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In 2021, palm oil prices breached the $1,000/mt level for the first time in a decade and notched record highs multiple times on the back of Malaysia's production woes, Indonesia's high export taxes, demand recovery in India, and renewed interest in biofuels which bolstered competing soybean oil prices.

In 2022, market observers expect prices to be supported in the near term due to supply tightness and then ease in the second half as foreign workers are reintroduced into Malaysian oil palm estates and production picks up. However, the omicron variant could complicate matters.

Additionally, the price of Malaysian crude palm oil futures, which underpins international palm oil prices, could also be weighed down by India's extension of unrestricted imports of refined palm oil products as the move could see demand shift to Indonesian palm olein.

New challenges for Malaysia

Supply side shocks in Malaysia have been prevalent throughout the year as pandemic led border closures in the country prevented foreign workers from returning to palm oil plantations.

While the Malaysian government announced that 32,000 foreign workers will be allowed back into the country to work on plantations, trade sources say the administrative formalities in reintroducing the workers along with the Ramadan holiday in April 2022 could slow down these efforts.

Market sources are also expecting a slight delay in the processing of the workers to be caused by the advent of the omicron variant.

"While quite alarming initially, I think the market has mostly shrugged of fears regarding this variant as it is reported to present mild symptoms...I believe production should be able to keep pace if these workers return to the plantations, but any tangible benefit will only be evident towards the end of H1 2022, " said a source.

Over the year, the Malaysian Palm Oil Board lowered its annual palm oil production gradually from over 19 million mt to between 18.1 million mt to 18.4 million mt.

Meanwhile Indonesia has not faced labor shortages as it relies largely on local manpower and the country's CPO output is expected to rise 2.6% next year to 51.01 million mt from a 2021 estimate of 49.71 million mt, head of Indonesia's Estate Crop Fund, Eddy Abdurrachman told local media on Dec 28.

Rising fertilizer costs

High fertilizer prices could increase the cost of palm oil production in Indonesia and Malaysia by 15%-20% year on year provided planters have already locked in their fertilizer orders by mid-2021, Singapore-based market analyst UOB Kay Hian said in a note Nov 10.

Prices of nitrogen and phosphorus -- the two main fertilizers used in palm oil farming -- have more than doubled over H2 2021 driven by supply disruption, strong demand, and higher input costs of LNG.

For plantation companies, the cost of fertilizers accounts for about 35%-40% of the cost of production. For smallholders it is roughly the same, but they usually do not apply fertilizers if the cost increases or the price of crude palm oil or CPO is too low, UOB Kay Hian analyst Jacquelyn Yow told Platts.

While the rising cost of fertilizer has been a concern, some market participants opined that current high prices would be enough to mitigate their cost.

"In a situation where the futures are at MR 2,500-MR 3,000/mt ($599.4 -$719.3/mt) I think this could be an issue, but prices are unusually high currently. I am not expecting the futures to retreat below MR 4,000/mt till at least H2 2022," said a trader.

Falling India demand

Expectations of cooling demand for crude palm oil or CPO from top vegetable oil buyer India could counter the supply tightness-driven market prices in the first quarter of 2022.

Indian buyers may rely more on import of cheaper refined palm oil products like palm olein over CPO after New Delhi extended its six-month window for unrestricted palm olein imports to year end-2022 and lowered import tax on Dec 20 to rein in high food inflation in the country.

With India's December ruling, the difference in India's duty between crude palm oil and palm olein has narrowed to 5% and combined with the discount at which palm olein is currently trading at, this could see a demand shift from Malaysian crude palm oil to Indonesian olein a trader told Platts.

"Indian buyers are likely to favor Indonesian olein imports, not only is the import duty difference minimal at destination, but it is also lower at origin [Indonesia's export tax and levy on CPO is higher than olein]. This could lead to a buildup of CPO inventory in Malaysia."

Monthly end stocks published by Malaysia's MPOB often dictate price action in the palm oil market. On Dec 10 Malaysia reported a better-than-expected end-November stocks at 1.82 million mt, raising expectations.

"This is a shock to the market as the average trade guess was in the range of 1.72 million-1.78 million mt," Anilkumar Bagani, head of research at vegetable oil brokerage Sunvin Group had said at the time.