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Palm Oil Prices to Weaken in 2023 on Higher Output

Fitch Ratings expects average crude palm oil (CPO) prices to be significantly lower in 2023, as industry output is likely to be higher. Lower prices should weaken Asian producers’ margins and EBITDA, and result in higher leverage. However, EBITDA should be supported by higher fruit yields and oil output. The free cash flow (FCF) profiles of producers should also benefit from a release of working capital.

We assume Malaysian benchmark CPO prices to average USD800/tonne (t) in 2023, compared with USD1,200/t in 2022. However, a drastic cut in market expectations of a jump in global vegetable oil supply next year, potentially due to the Russia-Ukraine war, is a key upside risk to our price assumption.

Latest industry data indicates that yields are trending up from 3Q22, following a weak 1H22. We expect output to improve further over the next year on better weather and lower flooding-related disruptions, with producers in Malaysia also gaining from a pick-up in inflow of foreign workers.

Companies reported a jump in inventories in 1H22, due to high prices. Producers in Indonesia were also significantly affected by the country’s three-week ban on exports from end-April 2022, which led to a surge in local stocks. We expect lower prices and the resumption in exports from Indonesia to help in working-capital release from 2H22.
Source: Fitch Ratings

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