New Delhi [India], November 21 : Fitch Ratings, a global leader in credit ratings and research projects a substantial drop in average crude palm oil (CPO) prices for 2024.
According to the Fitch Ratings report, this forecast is rooted in the expectation of increased palm and vegetable oil production, attributed to favourable weather conditions coinciding with a shift in global weather patterns.
The forecast indicates a significant decline in Malaysian benchmark CPO prices, with an estimated average of USD 650 per tonne (t) for the upcoming year, notably lower than the USD 830/t recorded in 2023.
While these lower prices are expected to exert pressure on producers' margins and EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), Fitch Ratings highlights potential mitigating factors.
Factors such as higher fruit yields, increased oil output, and lower unit production costs are anticipated to support EBITDA despite the challenging pricing environment.
Moreover, the expectation of improved Free Cash Flow (FCF) profiles is underpinned by the release of working capital, stemming from reduced inventories and trade receivables.
Fitch Ratings acknowledges that some issuers within its purview may have limited rating headroom in terms of credit metrics.
However, these entities are expected to fortify their financial positions by implementing strategic measures, including the curtailment of discretionary capital expenditures and dividends.
The report underscores a potential wildcard in the form of a strong El Nino, which could emerge as a game-changer.
A robust El Nino, characterized by dry weather conditions, may impact yields starting from the second half of 2024.
This climatic phenomenon is identified as a potential upside risk to Fitch Ratings' price assumptions, introducing an element of unpredictability to the palm oil market dynamics.
As the industry braces for potential challenges and opportunities, stakeholders, including producers and investors, are closely monitoring the interplay of weather patterns and market forces that will shape the trajectory of palm oil prices in the coming year.
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