Long-term demand to offset weaker prices for palm oil, says Moody's

Malaysian palm oil futures fell over 1 percent on Thursday after three consecutive sessions of gains, on expectations of rising inventory levels and technical selling.

KUALA LUMPUR: Moody's Investors Service sees crude palm oil (CPO) prices expects a pick up in demand in the long run to offset the weak prices as consumption continues to grow.

The international ratings agency said on Thursday CPO prices have fallen 14% since the start of 2018 and are at their lowest levels since 2015.

The weaker prices present a credit challenge for rated palm oil producers if they remain at current levels, it pointed out.

"Continued weak CPO prices will challenge the credit metrics of the four palm oil companies that we rate over the next 12-18 months, but the growing demand for palm oil will support their credit profiles over the medium to long term," says Maisam Hasnain, a Moody's analyst.

"We also expect that the governments of Indonesia and Malaysia -- which together produce around 85% of CPO globally -- will maintain supportive policies towards their respective palm oil industries and this will continue to provide a valuable underpinning for ratings in the sector," said Hasnain.

Moody's analysis is contained in its just-released report titled "Palm oil — Asia: Credit quality at risk if CPO price remains at current low point in price cycle". It is co-authored by Hasnain and Diana Beketova, a Moody's associate analyst.

Moody's report identifies three key risks that could hurt the revenue and earnings of palm oil producers over the next 12-18 months.

First, on the supply side, growing levels of palm oil inventories in Malaysia and Indonesia could further weaken the selling prices of CPO.

Second, on the demand side, additional tariffs and restrictions placed by the largest CPO-importing countries, such as India, would weaken demand and drive sales volumes lower. 

And third, weaker soybean oil prices could pressure CPO selling prices, because the two vegetable oils are close substitutes and their prices generally move in tandem.

“Nevertheless, Moody's says that palm oil consumption will likely grow and stay solid in countries such as Indonesia, India, and China in the medium to long term – as these economies grow -- supporting the credit quality of producers,” it said.