10/06/2010 (Agrimoney) - Palm oil prices fell in Kuala Lumpur despite official data showing that Malaysia's stocks of the vegetable oil have fallen by further than analysts expected to the lowest in eight months.

Malaysia's palm oil inventories fell by 3.7% last month to 1.56m tonnes, the lowest since September, and a figure some 50,000 tonnes less than investors had forecast according to a Reuters poll.

With tighter stocks typically signalling higher prices, and separate statistics from cargo surveyors showing Malaysian palm oil exports surging this month, the inventory figure was expected to enable Kuala Lumpur contracts to reverse early losses.

"This is a friendly number," a trader said.

However, the benchmark August lot closed 8 ringgit lower at 2,410 ringgit a tonne, within 1% of a setting a low for 2010.

Domestic demand
Some investors raised questions over the ability of local demand to continue soaking up the extra production Malaysian is likely to see over the next few months as it enters the peak seasonal period for palm production.

Malaysian palm oil data for June (month-on-month change)
Production: 1.385m tonnes (+6.1%)
Exports: 1.362m tonnes (+6.0%)
Stocks: 1.562m tonnes (-3.7%)
Source: Malaysian Palm Oil Board
 
"Production growth has yet to translate into a stock rise because exports and local consumption are still robust," the trader said.

In May, growth in exports and production both rose in step, by about 6% to approaching 1.4m tonnes, highlighting the role of Malaysian demand in lowering inventories.

Palm oil prices have also been undermined by rising prospects for world soybean production, and its potential for raising supplies of soyoil, palm's biggest rival in vegetable oil markets, and an alternative in many uses.

Indeed, Chicago soyoil prices have fallen by some 8% over the last month.

China to fix ties?
Furthermore, China, the biggest buyer of Malaysian palm oil, is seen as likely to resume buying soyoil from Argentina, after ditching imports in March as part of a wide-ranging trade dispute.

"We expect that China will resume large-scale purchases of [Argentine] soyoil and step up imports in the July-to-September quarter," Oil World, the analysis group, said.

"Chinese imports of other vegetable oils as well as soyoil output from domestic crushings of imported soybeans will be insufficient to cover [its] rapidly expanding requirements."

China's purchases of Malaysian palm oil doubled in the first 10 days of June, according to cargo surveyor Intertek Testing Services, with rival Societe Generale de Surveillance pegging the increase at 60%.

Malaysia is the world's second biggest palm oil producer, after Indonesia.