12/1/06 KUALA LUMPUR (Dow Jones)--Palm stearin prices are quietly rallying amid concerns of a supply shortage, bucking the general weakness in the broader palm oil market. Industry participants say they expect the trend to continue.

In Malaysia, the world's largest palm oil producer, spot refined, bleached, deodorized, or RBD, palm stearin has risen nearly 10% since the start of December.

Meanwhile, RBD palm olein, the main palm oil product, has been, at best, stagnant over the same period.
The contrasting trends of the two products have significantly reduced palm stearin's discount to palm olein to less than $10 a metric ton currently. Just a month or two earlier, the difference was $40 to $50/ton.

"Palm olein has always been the main product while palm stearin was seen as the unwanted byproduct and hence, priced at a discount," said a palm oil trader in Malaysia. "Now, the scenario is the other way around."

In the palm oil refining process, crude palm oil derived from the fruit of oil palms is processed to produce RBD palm oil.

The refined oil is then fractionated to obtain the liquid palm olein and the solid palm stearin.

The clear golden yellow palm olein is the most popular fraction, used mainly as a cooking oil in direct competition with other major edible oils like soyoil.

In comparison, palm stearin is white solid at room temperature and is used to make margarine and shortening as well as a feedstock in non-food industries such as soaps, candles and oleochemicals.

Palm olein prices have been under severe pressure since late-2005, hurt by the double whammy of a supply glut and poor consumer demand.

Malaysia's domestic palm oil stockpile, both crude and processed, hit an all time high of 1.6 million tons at end-November and remained at that level at end-December.

With recent estimates so far in January showing little export improvement, the high stocks situation looks set to persist for sometime.

Ample availability of competing oils, unfavorable import duties in India and the onset of cold winter weather, which affects the quality of palm olein, in northern hemisphere consuming countries, have been cited as reasons for the faltering exports.

Stearin Prices Rise As Margins Fall

For refiners, already plagued for years by poor margins, the recent weakness in olein selling prices due to uninspiring demand has exacerbated the gloom.

A strengthening Malaysian ringgit, which means decreased export earnings, is now threatening to erode margins even further.

As the production of the more dominant fraction of palm oil - palm olein - appear unprofitable at today's margins, there has been growing concern that refiners may be forced to cut back or halt operations.

The processing of palm oil generates more palm olein than palm stearin. The ratio of olein to stearin production in 2005 in Malaysia was 3.5-to-1.

A slowdown in refining output would help ease the supply overhang, allowing palm olein prices to stabilize and eventually recover.

As a result, however, palm stearin production would also fall, potentially resulting in a shortage.

That concern has been one of the reasons for the recent surge in palm stearin prices.

Higher palm stearin prices is also necessary to create an incentive for refiners to continue running their plants, industry participants said.


"Low demand for olein means low prices for it and hence, the price of stearin will have to go higher to compensate for the shortfall," specialty fats trading company Wawasan Tebrau Sdn. Bhd. said in a report this week.

Oleochemicals Boom Boosts Demand

Unlike palm olein, the palm stearin market has been on an uptrend as much for demand-driven reasons as for supply-fueled ones.

A boom in the oleochemicals industry, both at home and overseas, is fueling consumption for palm stearin.

According to data from the Malaysian Palm Oil Board, production of oleochemicals rose 13% on year to 2.02 million tons in 2005.

"With expanding oleochemicals capacity, palm stearin is in demand because it is cheaper than palm kernel oil. So, for applications where the oleochemical players can switch to a cheaper oil, they most certainly will," said a senior official at one of Malaysia's largest plantations and refinery groups.

Malaysian RBD palm stearin is currently trading at around $382.50/ton, free on board, for February/March delivery. Palm kernel oil, the main feedstock for oleochemicals, is priced nearly $200/ton higher.

Given the friendly supply and demand balance for palm stearin, further price gains may be possible in the coming weeks, possibly even to the point of rivaling palm olein prices, traders said.

"It's rare, but it has happened before, once in 1986 and then in 2002," a Singapore-based broker said, citing robust Chinese demand as a factor behind the strong prices then.

The potential for China to emerge as a key factor again appear rosy.

Industry officials such as Haron Siraj, chief executive officer of the Malaysian Palm Oil Promotion Council, who recently visited China have said demand for palm oil for oleochemicals is expected to rise this year.