Chemical Market Reporter, March 17 2003

COCONUT OIL prices for the first half of 2003 are expected to remain moreor less constant with the projection of lower coconut oil output in thePhilippines, the largest global coconut oil exporter, and the continuingdecline of global vegetable oil stocks for the rest of marketing year (MY)2002-2003.

Crude coconut oil prices have increased steadily for the past two yearsafter bottoming out in MY 2000-2001 at an average price of $323 per ton.In January, prices nearly reached the $500 per-metric-ton mark, asignificant increase from the $300 per-ton level seen in the first half of2001. However, prices are not expected to rise beyond the mid-$500 per tonlevel this year, as higher coconut oil pricing would likely faceresistance and substitution factors, especially from palm kernel oil, saysome analysts.

For the past two years, coconut production in the Philippines has endureda significant decline due to low rainfall. Total coconut oil production inthe Philippines for MY 2002-2003 is forecasted to decline by 2.4 percentfrom 1.35 million tons in MY 200 1-2002, according to the US Department ofAgriculture (USDA). Production is not expected to rebound until rainfallreturns to traditional levels, says the USDA analyst Thomas St. Clair.

"Coconut production is highly dependent on rainfall, and there is about a6 month lag between higher rainfall and more production. This will shiftsome business to Indonesia [the second largest coconut oil exporter],where rainfall has been closer to normal' Mr. St. Clair adds.

In addition to diminished production in the Philippines, global marketfundamentals for edible oils last year has helped push coconut oil pricingupwards. Palm kernel oil production in Malaysia also eased last year forsimilar weather reasons while demand for most edible oils rose with thesignificant decline of global sunflower, rapeseed and canola production.

In the past few weeks, however, coconut oil pricing has dipped slightly toaround $480 per ton, c.i.f., Rotterdam, in response to the currentweakness in major vegetable oil prices, notably palm oil and soybean oil.Some analysts deemed the price decline only temporary and project thatcoconut oil price are likely to reach $530 per ton to $550 per ton by theend of second quarter. 'The tightness in edible oils will probably stillincrease through the middle of this year, with prices rising into thesummer," according to one analyst.

However, one trader remarked that coconut oil pricing could face astruggle climbing backup, as palm kernel oil production is forecasted toincrease this year. "Coconut oil use, especially in the industrial sector,can easily be substituted with palm kernel oil, whose volume availabilityis reported to be progressively increasing," the trader says. 'The issueof whether or not the market can provide the global requirement forcoconut oil is not a grave concern for buyers, as long as there is enoughoil substitute in stock."

Global palm kernel oil production for MY 2002-2003 is forecasted toincrease by 3 percent from 3.14 million metric tons in MY 200 1-2002,according to a recent report from the USDA. Global coconut oil productionin 2002-2003 is expected to decline by 1 percent to 3.23 million tonscompared to 3.26 million tons in 200 1-2002 as projected decreases in thePhilippine coconut oil production offset the increase of coconut oilproduction in Indonesia and India.

With a lower production forecasted for coconut oil, consumption this yearis expected to decline as buyers shift to other readily available oils.Global coconut oil consumption for 2002-2003 is forecasted at 3.37 milliontons, a 2 percent decline from 2001-2002 projections of 3.43 million tons.The slowdown in the world economy is also a factor for the decline inconsumption, says one trader.