Thursday, October 30 2003 - WHILE the current rally in palm oil futureswill help pull Malaysian exports out of their current slump, economistscontend that a full recovery will largely depend on how the electrical andelectronic (E and E) industry fares.

Palm oil futures staged a surprise comeback recently, just as the marketbegan to presage the end of good times for the commodity. Its futurescontracts hit limit-up last week on a buying frenzy as industry forecasterOil World predicted palm oil prices will increase in the next six monthsas rival Chicago soyabean oil faces supply shortage.

The strong rally continued into this week. The spot crude palm oil futurescontract on the Malaysia Derivatives Exchange closed very positively onMonday, ending the week up some 10 per cent at RM1,801.50 a tonne, itshighest level since February 24 1999 almost five years ago.

The boom in palm oil and petroleum prices in the first half of 2003 hadbuoyed Malaysia’s exports, offsetting the impact of the country’sdwindling E and E sales. This time, higher prices and larger volume ofpalm oil sales could help curtail a further slump in exports.

Palm oil’s contribution to the total export has been steadily increasingin the past couple of years from 3 per cent in 2001 to 5.1 per cent inthe first half of this year. It hit a high of 6.9 per cent in August whenMalaysian producers shipped over RM2.1 billion worth of palm oil overseas.

Cargo surveyor Societe Generale de Surveillance said in the first 20 daysof October, exports stood at 820,681 tonnes, up by 2.6 per cent fromSeptember. While this may not be as bullish as previously indicated, itshows that exports look to remain strong.

Plantation analysts expect a shortage in global edible oil, widening pricediscount to soyabean oil and rising affluence and population of Malaysia’stwo biggest markets, namely China and India, should support strong demandfor palm oil next year.

But at only one tenth the size of E and E exports, a pick-up in palm oilshould cushion the downturn, to some extent, but for exports to recover,bottom line, it still has to come from electronics, said G.K. GohSecurities regional economist Song Seng Wun.

Without resource-based goods, Malaysia’s economy this year would fare muchworse. E and E exports, which make up half of the country’s exports, fell8.6 per cent year-to-date, compared with the 52.7 per cent jump in crudepalm oil and 32.6 per cent jump in crude petroleum.

Malaysia has seen two consecutive months of shrinking exports since Julydespite more bullish outlook in the second half, raising questions whetherthe country has been marginalised in the early stages of world economicrecovery.

Semiconductor exports previously strong despite sluggish overall E and Eoverseas sales contracted a sharp 16.3 per cent in August after losingits footing in July. Meanwhile, consumer electronics, another of Malaysia’s major exports, continue to see sluggish demand.

But despite the below-expectation growth in the third quarter so far,economists largely think the exports slump may not extend into September.

Affin-UOB Securities Sdn Bhd, in its research note, pointed out thatproduction of semiconductor and other electronics components picked upsharply to 12.4 per cent in August, from its sluggish single-digit growthin June and July.

Faster output growth of semiconductor and other electronics componentsimplies higher export orders, which should translate into better exportgrowth figures in the months after August, said the research house.

Meanwhile, the leading index for the 30 Organisation for EconomicCo-operation and Development countries has shown a positive trend, saysG.K. Goh’s Song.

The three-month lead index, which is closely tracked by Malaysia’s tradeperformance, has been recording growth for the three consecutive monthssince August.

September will also have higher number of working days compared with ayear ago, which is the opposite of what happened in August.

This, said Song, could be a factor in boosting the month’s exports.

Malaysia records roughly RM30 to RM31 billion worth of exports a month.For one less working day in any month could translate to some RM1 billionless in exports.