08/12/2016 (Jakarta Globe) - The price of palm kernel oil, trading at near six-year highs, will remain elevated until early 2017 amid tight supply before slipping as palm production recovers, traders and manufacturers said.

Costlier palm kernel oil is squeezing margins among oleochemical manufacturers which buy the raw material to make products later used to produce items such as detergent, soap and cosmetics.

These manufacturers end up absorbing the higher feedstock costs as they find it hard to pass them on to end-consumers.

"Despite high prices, demand is always there. Hopefully operations in China will slow down during the Chinese New Year so demand will ease a bit," said a manager at a Malaysian oleochemical manufacturing company.

China's week-long Lunar New Year break begins in late January.

Margins may remain squeezed through the first half of next year, the manager said, with supply of palm kernel oil taking longer to recover than crude palm oil due to its smaller production base.

The price of palm kernel oil began to surge when palm output this year took a hit from dry weather induced by El Nino, lowering palm fruit yields across Southeast Asia.

It has gained 85 percent since the start of the year, touching 7,275.22 ringgit ($1,641.71) per ton on Tuesday (06/12), the highest since at least January 2011, according to Thomson Reuters data .

In contrast, crude palm oil has only risen 28 percent this year.

Leading analysts expect to see a recovery in palm output as the El Nino effects wear off, but a full recovery will only be seen in the second half of 2017.

A recovery in palm oil output would help ease the tightness in palm kernel oil supply and tame prices, although prices could gain further in the short term.

"The shortage of working days in December and January will lead to further tightness in supplies," said a palm kernel oil trader, referring to the upcoming Christmas and Chinese New Year holidays.

"A price crash would be delayed until March or April."