This will lead to deferment in shipments and re-negotiation of deals

31/10/2008 (The Star Online) - Contract defaults on palm oil are expected to rise further in the next three months due to the current sharply discounted crude palm oil (CPO) prices.

This will lead to a deferment in palm oil shipments and a re-negotiation of import deals, particularly with China and India.

Analysts said palm oil traders and importers are defaulting because they had bought at much higher prices.

Industry observers told StarBiz that heavy import defaults from India were visible from as early as June, followed by China over the past two months.

In August, China importers were reported to have defaulted on at least 40,000 tonnes of palm olein while India defaulted on about 100,000 to 120,000 tonnes of vegetable oils.

More recently, it is believed that importers have defaulted on some 300,000 to 400,000 tonnes of local palm oil estimated at almost RM1.2bil.

The benchmark January contract for CPO closed unchanged at RM1,560 per tonne yesterday, a long way off its March high of nearly RM4,500, a plunge of over 60%.

Some analysts are projecting that if crude oil falls to US$50 a barrel, CPO could go down to RM1,200 per tonne, leading to higher default rates.

In 1998, when CPO fell to RM600 per tonne, some 100,000 tonnes of local palm oil were defaulted by importers and traders.

A local plantations analyst said the rise in defaults was not surprising, as “no one would want to lose money.”

“Many of the contracts were done at over RM3,000 per tonne, but now CPO is at about RM1,500,” he said. “Who would want to lose RM1,500 to RM2,000 per contract?”

Interband Group palm oil trader Jim Teh concurred that contract defaults would rise.

“Many traders have to re-negotiate their earlier contracts, which were done when CPO was trading above RM3,000 per tonne,” Teh said. “Now with CPO trading below RM1,500, many need to re-book their requirements based on current prices and some can only take about 50% of their earlier consignments.”

Industry players suffer a double whammy when they hedged forward their sales receipts at a time when the ringgit was stronger against the US dollar.

Industry consultant M.R. Chandran said excessive world palm oil stocks and escalating fears over the global economic slowdown had resulted in poor demand, thus pushing CPO prices lower to trade at about RM1,500 per tonne currently.

“Top players like Cargill, Wilmar and IOI group will have no problems selling their palm oil as they can pass it to their own refineries,” Chandran said.

“Those badly affected will be the medium and small planters who (do not own refineries and) are heavily dependent on their brokers and traders.”

Chandran said local palm exports had also started to slow down, with cargo surveyors reporting declines of up to 8.5% during the Sept 1 to 15 period, while September stocks of palm oil, which stood at 1.8 million tonnes, were expected to rise to almost two million tonnes in October.

By January 2009, Chandra said “there will be massive world palm oil stocks of about five million tonnes, two million from Malaysia and three million from Indonesia.”

The output in 2008 from Indonesia, the world’s largest palm oil producer, is estimated at 20 million tonnes while Malaysia’s is about 17.8 million tonnes.

Collectively, Malaysia and Indonesia produce about 80% of the world’s palm oil.

According to the Statistics Department, palm oil and palm oil-based products are the second largest export revenue earner for Malaysia, with a total combined value of RM45.2bil for first eight months of the year, contributing 10% to total exports.