KUALA LUMPUR (Nov 2): Moody's Investors Service has raised its price sensitivity range for crude palm oil (CPO) to RM2,800 to RM3,200 per metric ton (MT), from RM2,200 to RM2,600 per MT, through 2022, on the back of supply disruptions, low inventory levels and strong prices of competing oils.

While CPO prices will not fall substantially any time soon, they are unlikely to be sustained at current spot market levels over the longer term, said Moody’s in a statement on Tuesday.

"CPO prices are continuing a rally that started in mid-2020. Supply-side constraints, including labour shortages in major producer Malaysia (A3 stable), will keep CPO prices elevated through 2022," said Moody's vice president and senior analyst Maisam Hasnain.

The third month CPO futures contract fell RM111 to RM4,850 on Bursa Malaysia Derivatives in the morning session on Tuesday. 

Although Malaysia plans to allow the return of 32,000 foreign workers for the plantation sector, Moody’s opined that the ramp-up in work will take time and supply constraints will likely persist for the next six to 12 months.

Insufficient labour to maintain and harvest crops is also hurting fresh fruit bunch (FFB) production and FFB yields (metric tons of FFB per hectare of plantation), it added.

According to Moody’s, average month-end inventories in Malaysia so far in 2021 are lower versus 2020.

Month-end inventory levels in Indonesia, too, have decreased as of August 2021 to 3.4 million MT from 4.4 million MT in August 2020 as exports and domestic consumption outpaced production, it noted.  

“Meanwhile, strong prices of competing vegetable oils, as well as for crude oil, will also support CPO prices,” it said.

Soybean oil and CPO are substitute oils and their prices are strongly correlated. Prices for CPO and crude oil are also positively correlated because CPO is a biodiesel feedstock.

Moody's uses its CPO price range in its financial projections for rated companies to assess their projected performance over the next 18 to 24 months. The RM3,000 midpoint of the updated price range is 25% higher than the RM2,400 midpoint of the previous range.

According to the Malaysian Palm Oil Board, palm oil spot price stood at RM5,372.50 as of Nov 1. Year-to-date, it has risen 41.83%.