23/3/07 (Insider Asia)    - Palm oil statistics released over the past week show continued weakness in export demand, as high prices deter buyers. With crude oil prices back below US$60 (RM208.16) per barrel and the ringgit surging to a new 9.5-year high of RM3.464 per USD, we expect palm oil prices to come under pressure with its competitiveness being eroded further.

Last Monday, the Malaysian Palm Oil Board (MPOB) announced that crude palm oil exports for Feb 2007 fell 15% month-on-month (m-o-m) to 811,046 tonnes, while the export of all palm oil related products fell 11.4% m-o-m to 1.26 million tonnes. Palm oil production during the month fell 11.4% to 988,562 tonnes, while end stocks rose marginally from 1.474 million to 1.478 million tonnes.

This marks the fourth consecutive m-o-m decline for palm oil exports since Oct 2006, when palm oil prices started to rally sharply, from around RM1,500 to RM2,000 per tonne.

Exports of total palm oil products (including crude palm oil, palm kernel and oleochemicals) have fallen from 1.97 million tonnes in Oct 2006 to 1.82 million tonnes in Nov 2006, 1.76 million tonnes in Dec 2006, 1.42 million tonnes in Jan 2007 and 1.26 million tonnes in Feb 2007.

Although February is a seasonally slow month due to the shorter number of days and the Chinese New Year holidays, it was still a low figure. On a year-on-year basis, exports fell 2.1% from 1.282 million tonnes in February 2006.

Traditionally, exports pick up from March onwards. Last year for instance, exports surged from 1.28 million tonnes in Feb 2006 to 1.63 million tonnes in March 2006. However, this isn't the case so far this year. On Monday, cargo surveyor SGS Malaysia Bhd announced that palm oil exports for the period from 1-20 March 2007 fell 6.1% m-o-m to 596,774 tonnes.

Palm oil's rally outweighs soy oil
The sluggish demand for palm oil is due to high prices and the lack of demand from biodiesel, which was the main driver behind last year's price rally.

From mid-2006 until now, palm oil prices have risen by 40.7% from RM1,400 to RM1,970 per tonne. During the same period, soy oil prices rose by 17.4% from US$0.264 to around US$0.31 per pound while the ringgit strengthened 6.2% from RM3.68 to RM3.464 per USD. This means palm oil prices have risen 46.9% in USD terms – or 2.7 times the gains of soy oil.

Stock levels are still relatively high at 1.48 million tonnes in Feb 2007. Average monthly end stocks rose from 1.33 million tonnes in 2005 to 1.48 million tonnes in 2006. Production also seasonally rises from March onwards (up 16% m-o-m in March 2005 and 18.2% m-m in March 2006). This could raise stocks levels even higher in the coming months if exports remain weak.

Indeed, production is fast rising in Malaysia and Indonesia. Malaysian palm oil production grew 6.1% to 15.9 million tonnes in 2006, and is expected to rise by 5.5% to 16.7 million tonnes in 2007, according to the MPOB. The end of the El Nino last month will also ease pressure on output.

No biodiesel boost
Meanwhile, the commercial viability of palm bio-diesel is becoming more questionable as crude oil prices continue to slide. It isn't surprising therefore that earlier planned bio-diesel ventures are now being delayed. The government has so far issued about 90 bio-diesel licenses, but to-date only five plants have started operations, with another five planned to start this year.

Crude oil prices have now fallen 24% from a peak of US$78.40 to US$59.61 per barrel. In that same time, palm oil rose some 35% from around RM1,450 to RM1,950 per tonne -- and more in USD terms given the ringgit's strength. The viability of most bio-diesel projects is based on crude oil prices of around US$55 per barrel, and CPO prices of RM1,400 per tonne. - InsiderAsia