26/12/2008 (My.Sinchew), Malaysia - Reduced demand coupled with depressed prices are expected to pressure Malaysia's major commodities such as crude palm oil (CPO), rubber and tin next year.

For CPO, the good news is that prices, which were at a record of above RM4,000 earlier in March this year, have already hit rock bottom at around RM1,500 per tonne.

Market analysts expect prices to hover above RM1,600 the next two years.

As for rubber, they said prices which are currently around 400 sen per kg, would fall further in the first half of next year before recovering on increased demand.

Turning to tin, the analysts said they do not expect significant fall in prices next year from the current US$11,000 per tonne level. The commodity had hit a record level of US$25,000 in May this year.

As for the palm oil industry, plantation companies have been enjoying excellent profits with CPO prices hitting RM1,750 in the fourth quarter of 2006. Since then, prices continued to boom driven by strong demand from countries such as India and China, and demand from the biofuel sector.

However, in March this year, industry players especially smallholders experienced a reversal in fortune as CPO prices plunged due both to the declining crude oil price and demand affected by the impact from the US financial crisis.

The price of CPO fell by two-third from a high of RM4,486 per tonne in March to current level of about RM1,500 per tonne.

Some smallholders and exporters have been in a quandary since.

With the plunge in CPO prices, oil palm fruits have been left to rot with mills refusing to buy the fruits and many importers defaulting on their contracts.

The bearish environment prompted the government to immediately implement urgent and effective measures to help oil palm smallholders and industry. Among them have been the Palm Oil Replanting Incentive Scheme and the call to use a five percent mix of palm oil biodiesel (palm methyl esters) with petroleum diesel.

Malaysia and Indonesia also agreed to work closely on marketing, promoting and supply programmes for palm oil in a bid to stabilise the prices.

OSK Investment Bank plantation analyst Alvin Tai meanwhile said there could be a new upcycle in CPO price once it is clear that stocks are on a sustainable downtrend.

"We think palm oil prices will remain sideways until inventory levels start getting pared down, at which point we think palm oil prices will be ready for a new upcycle," he said.

With the government's efforts in stages, Tai expects CPO to see an average price of RM1,650 per tonne and the higher side to range between RM1,700 and RM1,800 per tonne.

Meanwhile, RAM Rating Services Bhd expects the average selling price for CPO to remain sustainable at above RM1,600 per tonne over the next two years.

"Notwithstanding the short-term correction in CPO prices, RAM opines that demand for palm oil (which is used largely for food) is expected to remain resilient, especially from large population-based countries like China and India," the rating agency said.

Commenting the impact of lower CPO prices on the economy, RAM's chief economist, Dr Yeah Kim Leng said the export revenue would be lower and hence the spending would be reduced.

Even with CPO prices at RM1,600 per tonne, Dr Yeah said plantation companies would still remain profitable if they are able to maintain their cost efficiencies and plantation management.

He said that amid the current economic slowdown, companies should maintain cost efficiencies rather than increase volume in order to protect their profit margin.

"As long as the prices are still above the cost of production, the industry is still sustainable," he added.

Plantation Industries and Commodities Minister Datuk Peter Chin Fah Kui had said earlier that the government's replanting programmes and biodiesel usage was to maintain CPO price at RM2,000 to RM2,600 per tonne.

"The implementation of these two important strategies will strengthen the growth of the palm oil industry in the long term," he said, adding that 500,000 tonnes of CPO per annum will be used for biodiesel.

On the rubber industry, a dealer said the weakening global demand is expected to further pressure the industry. He said buyers were cutting down purchases.

"Car manufacturers globally are expecting a drop in production due to the slowing demand and hence this will also reduce the demand for rubber from these manufacturers," he said.

This would keep the rubber prices at a bearish side in the first half of next year, he added.

However, he said rubber prices could see some recovery towards the end of 2009 amid the joint efforts by leading producers Indonesia, Malaysia and Thailand to reduce rubber output.

The three giant exporters of natural rubber, grouped under the International Tripartite Rubber Council (ITRC), had recently agreed to cut exports in 2009 by some 915,000 tonnes, or 16% of the 2008 total output, to prevent a further slumping in rubber prices.

This year saw both SMR 20 grade (Standard Malaysia Rubber) and latex in bulk touching a high of above 1,000 sen per kg and 500 sen per kg respectively.

As for the tin market, a dealer said the outlook was stable compared with CPO and rubber as the demand for the commodity was still there.

"The tin market is unlikely to be as challenged as CPO and rubber, given that the demand is still there though it is slow. Hence, the price on the Kuala Lumpur Tin Market (KLTM) is expected to stay at current level of US$11,000 per tonne level," the dealer added.

The price of tin on the KLTM, which stood at US$16,300 per tonne early this year, went up steadily touching a peak of US$25,000 per tonne before mid year. It has since come down and has been trading steadily above the US$11,000 per tonne level.