Fitch Ratings says the outlook for the palm oil sector is improving and higher prices will be credit positive for producers.

KUALA LUMPUR: Fitch Ratings says the outlook for the palm oil sector is improving and higher prices will be credit positive for producers.

Higher prices will be credit positive for producers as they will result in higher operating cash flows and improve CPO firms' credit profiles.

"While this is supportive of a stable sector outlook, there is a high positive correlation between CPO and crude oil. As a result, Fitch believes that the outlook for the sector remains muted, though improving."

In a latest report, it noted changes in supply and demand dynamics which point to higher prices.

CPO prices have been on the decline since April 2014 and the stock accumulation contributed to Fitch's initial negative sector outlook for 2016.

Declining prices, in particular, resulted in CPO firms' funds from operations (FFO)-adjusted net leverage significantly increasing in 2015.

It now expects CPO prices in 2016 to average higher than in 2015 as global demand holds up and output falls in Indonesia and Malaysia as a result of especially dry El Nino-related weather conditions.

"We expect the pre-export tax and levy CPO price to range between US$650/tonne and US$700/tonne this year."

Production fell in Malaysia, with output declining to an 18-month low of 1.04 million tonnes in February 2016.

This dragged stocks down from a peak of 53 days in November 2015 to as low as 27 days in March.

Industry association estimates in Indonesia also forecast a reduction in output there in 2016 - the first annual fall in production in at least 15 years.