05/12/2014 (Bloomberg) - Palm oil inventories in Malaysia probably climbed to the highest since February 2013 as a tax exemption on exports failed to spur shipments from the world’s second-biggest producer.

Stockpiles rose 5.5 percent to 2.29 million metric tons in November from 2.17 million tons a month earlier, according to the median estimate from six planters, analysts and traders compiled by Bloomberg. Output fell for a third month, dropping 4.8 percent to 1.80 million tons, while exports dropped 7.8 percent to 1.48 million tons, the survey showed. The Palm Oil Board is set to release official data on Dec. 10.

Futures in Kuala Lumpur are headed for the third annual loss in four years as global cooking oil supplies expand and a plunge in crude oil to the lowest since 2009 reduces demand for blending with gasoline. Malaysia extended tax-free exports until the end of the year in a bid to reduce reserves that Kenanga Investment Bank Bhd. estimates will top 2 million tons by the end of December, exceeding the government’s 1.6 million target.

“The probability of stockpiles being near the government’s comfort levels is low because of weak exports,” said Alan Lim, an analyst at Kenanga in Kuala Lumpur. “The removal of tax is good for short-term demand and the short-term push in demand is already over. Inventories by year-end could be in the range of 2 million tons to 2.2 million tons.”

Containing Inventories

Futures plunged to 1,914 ringgit ($555) a ton on Sept. 2, the lowest since March 2009, prompting Malaysia to scrap the export tax to cap stockpiles at its year-end target. Reserves would have jumped to as high as 2.2 million tons without the tax exemption, Malaysia’s Ministry of Plantation Industries and Commodities said on Sept. 5.

Most palm oil exports from Indonesia, the world’s biggest supplier, became tax-free in October after prices fell below the average level used to calculate tariffs. The two countries supply about 86 percent of global output, the U.S. Department of Agriculture estimates.

“As long as prices are below 2,250 ringgit, the zero export tax will continue” in Malaysia, Lim said. “Prices may remain weak unless there is any disruption in production due to weather-related issues.”

Futures have fallen 18 percent this year and ended at 2,173 ringgit on the Bursa Malaysia Derivatives today, the highest level at close since Nov. 27. Palm’s discount to soybean oil more than doubled to $75.58 a ton from a three-year low of $35.38 on Nov. 11, according to data compiled by Bloomberg.

‘Losing Magic’

“Zero-export tax promotion may lose its magic as a widening price gap suggests that demand is switching from palm to soybean oil, especially during the cold season,” said Hiro Chai, associate director at CIMB Futures Sdn. in Kuala Lumpur. “Export numbers in December will not look good as consumers are not fond of palm in the cold season.”

Shipments from Malaysia retreated 9.8 percent to 1.32 million tons in November from 1.47 million tons a month earlier, Intertek, a surveyor, said on Dec. 1.

“The market is now concerned with what will be the production in December and January,” Paramalingam Supramaniam, a director at Pelindung Bestari Sdn. Bhd., said by phone from Selangor. “We can already see signs of a massive plunge in production in December because of extensive rainfall.”

Prices may reach 2,500 ringgit by March 4 and extend gains as inventories bottom around June, Dorab Mistry, director at Godrej International Ltd., said Nov. 28. Biodiesel policies in Indonesia will determine the direction of prices in the next 12 months, he said.