MARKET DEVELOPMENT
Palm Oil Prices to Rise 14pc in 2014 on Demand from Biofuel Sector
Palm Oil Prices to Rise 14pc in 2014 on Demand from Biofuel Sector
12/02/2014 (Business Recorder) - Palm oil prices are expected to climb for a second straight year in 2014, as strong demand from the biofuel industry soaks up supplies and curbs exports from top producers of the tropical oil, a Reuters poll showed.
Improved demand should also coincide with a weaker period of Southeast Asian output, pushing up benchmark palm oil prices nearly 14 percent to 2,700 ringgit ($808) per tonne this year, from an average of 2,371 ringgit in 2013, according to the median estimate of 28 analysts polled by Reuters.
"Unlike the past three years when big swings in supply impacted palm oil pricing the most, we believe demand will take the lead in 2014," HSBC analyst Thilan Wickramasinghe said. "Ambitious biodiesel mandates in Indonesia and Malaysia should keep more palm oil at home."
The two countries, which account for nearly all of the world's palm oil supply, are geared for aggressive biodiesel programmes this year which could absorb up to 11 percent of domestic output, according to analysts.
Indonesia has raised its minimum bio content in diesel to 10 percent, while No.2 grower Malaysia is also looking to hike its requirements as it tries to whittle down palm stocks and cushion prices amid growing competition from other edible oils. Major planters such as Sime Darby, IOI Corp and Wilmar International could see their profit margins improve as palm prices recover further from their 35 percent plunge over the two years ended 2012.
The benchmark Malaysian price rose by 9 percent in 2013 on strengthening demand for the vegetable oil that is used in a variety of products from soaps to chocolates.
Prices should get more support from lower output in Indonesia, where oil palm trees in some areas are suffering from biological "tree stress" after churning out robust yields in the past few years.
Indonesia's production is expected to fall 1.9 percent to 27.5 million tonnes this year, leading to the first decline since 1998, Public Investment Bank analyst Chong Hoe Leong said. "Local industry players expect the recovery of production to only in kick in from May," the analyst added. New plantings will also be limited in both countries due to land scarcity, tighter government regulations on expansion and higher labour costs.
Threat To Price Recovery
Some analysts, however, said Malaysia's output could spike between June and September when a seasonally higher production cycle kicks in, keeping a lid on prices.
Industry regulator the Malaysian Palm Oil Board has said that the country's crude palm oil production could hit a record high of 19.5 million tonnes in 2014.
Forecasts for a bumper production of rival soyoil is the other threat to palm oil prices, the poll participants said. Market players are bracing for record soybean production in Brazil and Argentina.
A larger soybean supply for crushing into vegetable oil would channel demand away from palm oil as these are often used as substitutes for each other.
Refined palm olein currently trades at about a $60 discount to soy oil, steeply narrower than a spread of $300 seen at the start of 2013.
The spread could go below historical levels, leading to some erosion in demand for palm oil, Rabobank said in a note. But the growing need for the tropical oil from the biodiesel industry will help underpin prices, which are expected to rise to 2,800 ringgit in 2015, according to the poll.
Leading industry analyst Dorab Mistry said in November: "If you ask me for the three most important factors for palm oil today, my answer will simply be: biodiesel, biodiesel and biodiesel."
Improved demand should also coincide with a weaker period of Southeast Asian output, pushing up benchmark palm oil prices nearly 14 percent to 2,700 ringgit ($808) per tonne this year, from an average of 2,371 ringgit in 2013, according to the median estimate of 28 analysts polled by Reuters.
"Unlike the past three years when big swings in supply impacted palm oil pricing the most, we believe demand will take the lead in 2014," HSBC analyst Thilan Wickramasinghe said. "Ambitious biodiesel mandates in Indonesia and Malaysia should keep more palm oil at home."
The two countries, which account for nearly all of the world's palm oil supply, are geared for aggressive biodiesel programmes this year which could absorb up to 11 percent of domestic output, according to analysts.
Indonesia has raised its minimum bio content in diesel to 10 percent, while No.2 grower Malaysia is also looking to hike its requirements as it tries to whittle down palm stocks and cushion prices amid growing competition from other edible oils. Major planters such as Sime Darby, IOI Corp and Wilmar International could see their profit margins improve as palm prices recover further from their 35 percent plunge over the two years ended 2012.
The benchmark Malaysian price rose by 9 percent in 2013 on strengthening demand for the vegetable oil that is used in a variety of products from soaps to chocolates.
Prices should get more support from lower output in Indonesia, where oil palm trees in some areas are suffering from biological "tree stress" after churning out robust yields in the past few years.
Indonesia's production is expected to fall 1.9 percent to 27.5 million tonnes this year, leading to the first decline since 1998, Public Investment Bank analyst Chong Hoe Leong said. "Local industry players expect the recovery of production to only in kick in from May," the analyst added. New plantings will also be limited in both countries due to land scarcity, tighter government regulations on expansion and higher labour costs.
Threat To Price Recovery
Some analysts, however, said Malaysia's output could spike between June and September when a seasonally higher production cycle kicks in, keeping a lid on prices.
Industry regulator the Malaysian Palm Oil Board has said that the country's crude palm oil production could hit a record high of 19.5 million tonnes in 2014.
Forecasts for a bumper production of rival soyoil is the other threat to palm oil prices, the poll participants said. Market players are bracing for record soybean production in Brazil and Argentina.
A larger soybean supply for crushing into vegetable oil would channel demand away from palm oil as these are often used as substitutes for each other.
Refined palm olein currently trades at about a $60 discount to soy oil, steeply narrower than a spread of $300 seen at the start of 2013.
The spread could go below historical levels, leading to some erosion in demand for palm oil, Rabobank said in a note. But the growing need for the tropical oil from the biodiesel industry will help underpin prices, which are expected to rise to 2,800 ringgit in 2015, according to the poll.
Leading industry analyst Dorab Mistry said in November: "If you ask me for the three most important factors for palm oil today, my answer will simply be: biodiesel, biodiesel and biodiesel."
Copyright Reuters, 2014