Saturday October 9, 2004 - THE 12th of every month is significant toinvestment research analysts who cover the plantation sector. That is whenthe Malaysian Palm Oil Board releases statistics on the previous month'sperformance of the Malaysian oil palm industry.

This week, as usual, the analysts will be sifting through the Septemberfigures for clues that either confirm or hint at new key trends. Whatcould be different this time around is that some of the analysts may bemore interested in the palm oil exports to the United States.

The US has always had an influence on the global palm oil market. But itis an indirect relation by virtue of its position as the world's largestgrower of soybeans, whose oil and palm oil are close substitutes.

Now, some observers believe that the US is set to become a major importerof Malaysian palm oil. That is why they will be keen to see if theSeptember exports to the US will reinforce the argument that the market isheading for a structural shift.

As it is, the volume of palm oil shipped to the US between January andAugust this year has jumped by almost 70% compared with that of the sameperiod last year.

Add the US factor to China and India's enormous consumption growth, andyou have the right conditions to keep crude palm oil prices at healthylevels. Says RHB Research Institute, CPO prices of RM1,400 to RM1,500 aresustainable. If they reach RM2,000, it'll be bonus. But the bottom line isthat there is limited downside risk.

Three letters are behind the analysts' optimism that the US demand for CPOwill swell TFA. That's trans fatty acids (also called trans fats), asubstance that been linked to cardiovascular diseases.

(According to literature from the Malaysian Palm Oil Promotion Council(MPOPC), TFA are formed when liquid vegetable oils are chemicallyprocessed to improve the stability and texture of shortenings andmargarine. Because palm oil is naturally semi-solid, it does not needhydrogenation.)

A key event was when the US Food and Drug Administration (FDA) amended itsregulations in July 2003 to require that TFA be declared in the nutritionlabel of conventional foods and dietary supplements by Jan 1, 2006.

This is huge for palm oil as consumers are now able to differentiatebetween saturated fats and trans fats, says Mohamed Salleh Kassim,executive director of the Los Angeles-based American Palm Oil Council, anoffshoot of MPOPC.

This new rule has pushed many food manufacturers to look for TFA-freealternatives. And the pressure is mounting.

Washington DC's Center for Science in the Public Interest (CSPI), whichbills itself as the premier nutrition advocacy organisation, haspetitioned the FDA twice this year (in May and July) in its campaignagainst partially hydrogenated oils, which contain TFA.

The last time CSPI had petitioned the FDA on TFA back in February 1994the action has led to the new labelling rules.

Because of its properties and relatively low cost, palm oil is a leadingoption in the efforts to produce processed foods with zero TFA. Many inthe palm oil industry see the recent developments in the US as a greatopportunity for Malaysian palm oil to break into the American market.

In his statement in IOI Corp Bhd's annual report 2004, executive chairmanTan Sri Lee Shin Cheng reports that the company's speciality oil and fatssubsidiary, Loders Croklaan, has been at the vanguard of promoting a palmoil-based application solution for TFA-free food production in the US.

According to Mohamed Salleh of the American Palm Oil Council, the US foodmanufacturers are trying to stick to soybean oil to solve the TFA issue,but this is costly.

The easier and cheaper option would be to replace the partiallyhydrogenated fats with naturally saturated oils like palm oil and itsfractions, he says.

So come Jan 1, 2006, we would expect to maybe see a good percentageincrease in the usage of palm oil to replace partially hydrogenated fats,especially in the initial years. That is, if manufacturers chooses palmoil.

It is encouraging that leading food companies, such as Kraft and Kelloggs,have begun using palm oil in their food formulations.

Avenue Securities is among those who believe that the TFA issue is atremendous boost for palm oil growers. Positive structural changes are setto happen to palm oil, which is trans fat-free and a non-GM (geneticallymodified) crop, says the stockbroking firm in an Oct 1 report on theplantation sector.

However, not all industry observers believe that the American companies'quest to eliminate TFA in food will result in a bonanza for the oil palmbusiness.

In a May report, JP Morgan says it agrees that the TFA issue is a positivefor palm oil demand but the investment house doubts that the impact ofusing palm oil as a replacement will be strong enough to hold sway overCPO prices.

It argues that palm oil is not the only substitute being considered byfood manufacturers and that it is not an ideal substitute because it is asaturated fat. JP Morgan points out that the conventional wisdom in the USis that saturated fats should still be avoided as it increases badcholesterol.

In all probability, the additional demand for palm oil will be less than3.5% of global demand. Given the January 2006 deadline for TFA labeling,we expect the bulk of any additional demand would only come in 2005, itadds.