08/02/2010 (Agrimoney.com) - Palm oil prices are "likely to remain firm" this year, driving a pick up in plantings by Indonesian plantation owns, Fitch has said in a report flagging the sector's robust balance sheets".

Production for palm oil could be held back by the lingering impacts of the El Nino weather pattern, as well as a government-backed reseeding campaign in Malaysia which is expected to cut output by 500,000 tonnes, the ratings agency said.

However, demand will be buoyed by a jump in European and South American consumption of vegetable oils by biodiesel plants, and by rising consumption of edible oils both in China and India, the world's top two palm oil importers.

'Edible oil deficits'

"In China, the domestic production of edible oils is not envisaged to due to reduced planted area," Fitch said.

Top palm oil producers, 2009-10 (year-on-year change)
1: Indonesia, 20.75m tonnes (+6.4%)
2: Malaysia, 18.50m tonnes (+7.2%)
3: Thailand, 1.30m tonnes (+15.4%)
4: Nigeria, 820,000 tonnes (unchanged)
5: Colombia, 780,000 tonnes (+4.0%)
World, 45.13m tonnes (+6.4%)
Source: USDA
 
"India will drive demand growth in light of its zero import duty, which will likely continue along with the inflation control policy carried out since early 2009."

India's overall edible oil consumption grew by 800,000 tonnes to 15.1m tonnes last year.

"With global palm oil demand rising faster than supply - primarily driven by India and China, which have significant edible oil deficits – palm oil prices are likely to remain firm in 2010," Fitch said.

Although more robust supplies of soybeans, from which rival soyoil is produced, could see palm oil prices "soften towards the latter part of 2010, the downside risk to palm oil prices appears limited", the ratings agency said.

Plantation programmes

In Indonesia, strong palm oil prices, coupled with a drop in the price of fertilizers which account for half of production costs, should improve operators' fortunes, prompting them to revisit investment programmes shelved during last year's economic crisis.

"Profitability and operating cash flow generation of the industry as a whole should benefit," Fitch said.

"For Indonesian producers, Fitch anticipates that greenfield planting could be expedited due to vast unplanted areas."

Indonesia has, in particular, encouraged palm plantations, allowing it to overtake Malaysia to become the world's top producer some five years ago.

Analysis group Oil World believes Indonesia's share of global output will hit 50% this year, up from 47% in 2009.

Fitch forecast that Indonesian-based IOI Group and Ciliandra Perkasa, which is controlled by Frist Resources, would maintain "strong" financial profiles.