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Omicron, high cost of fertilisers may threaten CPO production recovery in 2022 - CPOPC

02/01/2022 10:44 AM

By Nurul Hanis Izmir

KUALA LUMPUR, Jan 2 -- The supply of foreign workers in oil palm estates amid the ongoing flooding in some of the states in Malaysia, the high cost of fertilisers, and the impact of Omicron are three key factors that may threaten the production recovery of crude palm oil (CPO) in 2022, according to the Council of Palm Oil Producing Countries (CPOPC).

The tight CPO stocks, however, are in line with the limited supply of vegetable oils globally which analysts have projected to push the commodity higher at least for the first half of the year.

The easing of labour shortage would only materialise in the first quarter of 2022, with palm oil output to recover after June 2022, they said.

“LMC International highlighted that the global palm oil supply will only see minimal growth in the 2019-2022 period due to year-end floods and labour shortage in the country,” the council said in its outlook report.

The CPOPC also noted that in its webinar held two months ago that the majority of the speakers had expected palm oil prices to remain buoyant in the first half of 2022 and trend lower in the second half.

The Indonesian Palm Oil Association (GAPKI), for example, expects palm oil to stay above US$1,000 per tonne (US$1=RM4.18) in the first half of 2022 and potentially for the rest of 2022.

LMC International also reported that Indonesia and Malaysia are in a long La Nina period in which the Oceanic Nino Index (ONI) is “more negative than  minus 0.5.” The pattern of the ONI curve since 2020 echoes that of 2010-2011, with a La Nina weakening and then returning, it noted.

“If 2012 is taken as a guide, La Nina should end in 2022. A rising ONI is correlated with rising output growth, and a falling ONI is linked to slowing output growth. This is especially true for Indonesian production,” the report said. “With La Nina, there would be twin blows from heavy rainfall at estates and El Nino drought in the following years. In view of the apparent link between the ONI and output growth, in Indonesia, LMC International predicted there will not be much palm oil production growth in 2022.”

The US National Oceanic Atmospheric Administration (NOAA) has predicted a 95 per cent chance for a weak La Nina lasting through February 2022.

El Nino is a phenomenon of dry conditions for harvesting with the benefit of the previous year's rains.


Higher fertiliser cost reducing output

The council said that the high cost of fertilisers due to supply chain disruption, higher demand, rising freight, and input costs would result in smallholders lowering their fertiliser applications this year, potentially reducing future output in the years ahead.

It noted that fertiliser is another major cost component after labour cost for palm oil producers, which is about 30 per cent to 35 per cent of the ex-mill cost.

“Companies would continue to feed their oil palm trees this nutrient despite the high price but they may not receive the ordered volume due to supply constraints and uncertain shipment arrangements.

“Oil palm planters are highly dependent on imported fertilisers but those in Indonesia have an advantage as local urea production is sufficient to meet the domestic demand.

“Based on industry sources, the estimated fertiliser imports for 2021 are 60 per cent to 65 pr cent of the usual annual requirements.

“As the logistics bottleneck is unlikely to ease anytime soon, 2022 could see even lower fertiliser imports. “Smallholders may be tempted to give less fertiliser to their trees again.

“The impact of reduced fertiliser usage back in 2018 and 2019 is showing today as the yield recovery is weaker than normal.  As a result, Indonesia and Malaysia may not be able to deliver much output growth in 2022,” the CPOPC said.

Palm oil production in Indonesia was 6.7 per cent higher in the second quarter of 2021, gathering pace from the 1.5 per cent growth in the first quarter, spurred by better rainfall in 2020.

However, the output in the third quarter was slightly curbed by floods in Kalimantan, which disrupted oil palm fruit harvesting while in the fourth quarter, Indonesian Palm Oil Association (GAPKI) announced that production fell further.

GAPKI revised its palm oil output forecast for Indonesia to 46.6 million tonnes, down 0.9 per cent from 2020.

The Malaysian Palm Oil Board (MPOB) estimated that in 2021 palm oil output in the country will drop to 18.3 million tonnes from 2020's 19.2 million tonnes.

Palm oil ending stocks are expected to stay below average levels of 4.0 million tonnes in Indonesia and 2.1 million tonnes in Malaysia.

Both Indonesia and Malaysia produce about 85 per cent of the world's palm oil needs.


Demand Outlook

The leading palm oil importers would still continue to be China and India, the two most populous nations in the world.

China is the world's second largest buyer of palm oil after India and imports about six to seven million tonnes of the tropical commodity from Indonesia and Malaysia every year.

“In 2022, China's palm oil consumption is expected to increase due to a lower supply of rapeseed oil and soybean oil. China is also seen to buy more palm products for its animal feed.

“Meanwhile,  India's palm oil purchase is likely to be spurred by a recovery in its hotel, restaurant, and catering segment and its lowering of palm oil import duties,” the CPOPC said.

India palm oil imports are estimated at 8.6 million tonnes in 2021/22.

Exports to the European Union (EU)  are expected to be muted this year, partly due to unattractive palm oil prices for biodiesel blending and early implementation of RED II renewable energy measures by some EU member countries, thus curbing palm oil imports.

The European Commission's proposed law and due diligence to require proof that agricultural imports are not linked to deforestation could potentially dampen palm oil sentiment. 

According to Refinitiv Agricultural Research, global palm oil demand for 2021/22 is forecast at 50.6 million tonnes, up 6.5 per cent compared to the prior season, provided there is no large-scale demand destruction.

“There are more palm oil shipments to the Middle Kingdom ahead of the Lunar New Year and Winter Olympics in February 2022.

“However, the upside could be limited in the months ahead by recent higher soybean crushing activities amid better crushing margins, which will lead to higher domestic soybean oil supplies.

“Also, refined bleached deodorised palm olein’s discounts on soybean oil have been narrowing, thus potentially dulling consumer buying interest,” it added.


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