Tuesday March 22, 2005 - THE prolonged drought in the region will have apositive impact on the prices of commodities like crude palm oil (CPO) andrubber, but production will be lower.

Industry players and dealers told StarBiz that in an El-Nino condition -normally associated with prolonged drought conditions - production of CPOcan fall by 2%-3%, and rubber by about 5%-8%.

Malaysian Palm Oil Association chief executive M.R. Chandran said: "If thedry spell continues into the traditional wet months of April and May, thereduction in palm oil production will be felt over the next 18 to 24months."

Palm oil production this year will likely be almost the same as lastyear's 13.9 million tonnes or slightly lower.

"This will be good for CPO prices, as expectation of lower production willtrigger prices to rise to between RM1,490 and RM1,495 a tonne in thecoming months, and possibly remain above RM1,500 a tonne in 2006,"Chandran said.

He also expects the current high palm oil stocks, of about 1.5 milliontonnes as of last month, to ease to 1.3 million tonnes next month.

"The years 2006 and 2007 will definitely be exciting for CPO, with manyglobal players projecting demand to exceed supply," Chandran said.

Spot CPO finished at RM1,435 a tonne yesterday, compared with RM1,455 lastFriday.

Mayban Securities' plantation analyst said a prolonged dry spell wouldaffect the flowering process in oil palm trees, and would have a dampeningimpact over the next six to nine months' production, especially during thepeak months of August and September.

"It will be no surprise if palm oil production falls short of theMalaysian Palm Oil Board's forecast of 14.2 million tonnes this year. Thiswill also put a strain on the supply factor if exports remain firm," theanalyst added. Palm oil exports this year are expected to hit 13.8 milliontonnes.

Mayban Securities maintains an 'overweight' stance on the plantationsector given the strong fundamentals surrounding palm oil demand, but notsolely premised on the expectation of higher CPO prices going forward.

Chandran is confident that rubber prices will similarly strengthen, due toanticipation of a lower yield this year on account of the current dryspell.

"I expect demand from major importers like China, the United States andEurope to remain robust this year, and to provide a positive outlook forour natural rubber," he added.

China, which registered 10% economic growth annually in recent years, isexpected to produce four million cars over the next four to five years,from one million currently.

A dealer with a major rubber plantation group said the price of rubber hadbeen on the rise over the past three years, boosted by higher crude oilprices, currently about US$58 a barrel.

This had resulted in higher synthetic rubber prices, prompting most majorconsuming countries to opt for natural rubber.

The price of SMR20 physical eased 1 sen to 468.50 sen per kilo yesterday.

"I believe Perlis, Kedah and Perak " which contribute about 20%-25% ofMalaysia's rubber production " will be affected by the prolonged dryspell," the dealer said, adding that January to March were normallywintering months, when rubber production falls.

Malaysia is the world's third largest producer of natural rubber withtotal output of 950,000 tonnes a year, behind Thailand (2.3 milliontonnes) and Indonesia (1.5 million tonnes).