12/02/2009 (The Star Online), Petaling Jaya - Declining palm oil inventories and lower production in January failed to lift crude palm oil (CPO) prices yesterday, with the benchmark April CPO contract losing RM44 to RM1,925 per tonne on Bursa Malaysia Derivatives.

But analysts continue to expect CPO prices to rise going forward.

The Malaysian Palm Oil Board (MPOB) reported yesterday that palm oil stockpiles for January fell to 1.83 million tonnes from 1.99 million last December.

Production was down by 10% to 1.33 million tonnes while exports dropped 17% to 1.35 million tonnes.

A CPO futures trader told StarBiz that the declining palm oil stockpiles was a “definite” relief after a record 2.3 million tonnes last November.

“High inventory of above two million tonnes saw the CPO price hitting rock bottom at RM1,400 in November,” he noted.

The trader said the lower output in January could be the result of the focus on replanting as local planters took advantage of government incentives for replanting, the impact on yields as planters cut down on the use of costly fertilisers and due to “biological tree stress.”

Maybank Investment Bank’s analyst Ong Chee Ting noted that an abnormal heavy rainfall and landslides in Sabah, which cut off access roads to mills and ports, had disrupted palm oil harvest.

“The current short-term fundamentals, that is decreasing stockpiles and lower production, should provide a positive impact to the current CPO prices,” Ong said.

Citi Investment Research said tightening supplies of rival oils, such as soybean, could lift the price of CPO.

Continuing drought, said to be the worst in 50 years in South America, would have an impact on soybean production areas especially in Argentina and Brazil, it said.

The research house also said the supply of oilseeds could be tighter than expected as some producers had reacted to the collapse in commodity prices since last June by reducing investments.

Palm oil tracks the prices of soybean oil and crude oil as it is a substitute for soybean oil and is used as feedstock in the production of biofuel.

On the export outlook, Citi said: “It is seasonal for CPO exports to slow down in January and February, and later pick up in March.”

China is expected to start buying CPO aggressively from March onwards based on its traditional purchasing pattern.