Wednesday June 8, 2005 - THE crude palm oil (CPO) market will continueto thrive with prices expected to hold firm and well supported at RM1,400to RM1,600 per tonne in the next two years, according to a research house.

Citigroup Smith Barney in a research report said the fall in CPO prices tobetween RM1,300 and RM1,500 per tonne since the start of the year was dueto industry players' concerns over rising inventory levels.

It said the 1 million-tonne mark used by the industry to indicate over- orunder-supply of CPO was not a true reflection of market demand as itexcluded both global inventory levels and consumption trends.

It said industry players were concerned when the average CPO inventorylevel of 1.5 million tonnes in January to April was 24% higher than the1.2 million tonnes stock level recorded in the corresponding period lastyear. However, CPO consumption had consistently increased to 31.4 milliontonnes last year, or 226% during an 11-year period, from 12.9 milliontonnes in 1993.

It added that a better indicator of the CPO market is global CPO stocksover global CPO consumption ratio. "Although this ratio is projected at14.2% for this year, which is lower than 14.5% last year, structuraldemand drivers of this market remain intact," said the research report.

It cited a new European Union (EU) regulation on vegetable oil consumptionto be a substantial demand driver for the local CPO market as the EU isthe largest CPO importer, accounting for 18% of total exports from Januaryto April.

This regulation is expected to double EU’s usage of vegetable oil from2.5% of total fuel consumed to 5.7% by 2010. The research report addedthat CPO remained a globally competitive product owing to its predictableand constant supply as well as cost competitiveness (cheaper than soybeanoil and rapeseed oil by US$120 per tonne and US$218 per tonnerespectively).

It also expects US demand to continue increasing with the requirement todisclose the level of trans-fatty acid on food product labels by 2006. Theresearch house said food manufacturers will find CPO a suitablealternative to soybean oil (hydrogenated soybean oil has a highertrans-fatty acid content) and the resulting demand from this switch willreduce the price discount between CPO prices and soybean oil prices.

The research report added that China as the second largest importer of CPOcontinues to remain a robust market. Last year CPO occupied 14% of itsedible oil market and is expected to rise at the expense of other oilssuch as lard. On the domestic front, the bio-diesel plant constructed bythe Malaysian Palm Oil Board will create a demand for 60,000 tonnes of CPOupon completion in 2007.