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MARKET DEVELOPMENT
Rising output puts palm oil under pressure
calendar13-06-2005 | linkBusiness Line | Share This Post:

Mumbai , June 10 - AFTER doggedly holding on to relatively high pricesfor several weeks, the palm oil market may be readying for a crash withrapidly rising production and trailing exports.

The indications are clear that Malaysian palm oil output would rise thisyear by as much as 1.5 million tonnes from last year.

If the weather continues to hold well in the US, the global vegetable oilmarket could find some major downward movement.

At the Bursa Malaysia Derivatives on Thursday, third month crude palm oilplummeted to close at RM 1,366 a tonne - after stubbornly clinging to thepsychological price level of RM 1400 a tonne and above for a fairly longtime even in the face of rising inventory. A further downward drift isseen inevitable looking at the demand-supply fundamentals.

The marked fall should, however, come as little surprise to those who havebeen closely monitoring crude palm oil production and export numbers.

According to current assessment, looking at the growth rates in recentmonths, crude palm oil output in Malaysia this year has the potential tofar exceed 15 million tonnes and indeed register 15.5 mt and possiblyreach 15.7 mt as compared with the initial expectation of about 14.5 mt.

Earlier, the Malaysian Palm Oil Board had projected 2005 production at aconservative 14.2 mt versus 13.9 mt in 2004. International experts such asMr Thomas Mielke of the Hamburg-based Oil World magazine had forecast theoutput at 14.7 mt. The US Department of Agriculture had, however, seenproduction exceeding 15 mt.

Interestingly, peak production months for Malaysian palm oil are betweenApril and September, and the market is exactly in the midst of the peakseason.

According to Mr A.R. Ramamoorthy of A.R. International, a Hyderabad-basedtrade intermediary, in the least, Malaysian palm oil production this yearwould register 15.25 mt and if the rest of the peak production monthscontinue to show robust increases, the total for the year could well endup in excess of 15.7 mt.

Sharing his detailed calculations with Business Line, Mr Ramamoorthyshowed that Malaysia's closing stock for the year could be a record 1.65mt even after export of as much as 14 mt.

The increase in production this year can be attributed to replanting ofabout two lakh hectares that took place in 2000 and 2001 when senile treeswere felled as a response to low palm oil prices. The palm oil market atthat time was going through a long bear phase with prices plummeting belowRM 1,000 a tonne.

Belief is now increasingly gaining ground that the export numbers thatwere witnessed in recent months may not be sustained during the rest ofthe year.

In order to manage the tank-bursting inventory, Malaysians, it is widelyspeculated, are transferring stocks to other countries rather thanactually selling.

Should that be even partly true, actual shipments of palm oil over thenext quarter are likely to slowdown, adding to the already burdensomestock position at the origin. The crude palm oil market clearly looksoverdone and it may be time for a clear downward correction.

The unusually large arrivals of palm oil into India during April and Mayshould be seen in this context. Crude palm oil constituted 6.5 lakh tonnesout of the 10.5 lakh tonnes that arrived in the country during the lasttwo months.

Imports took place at a time when domestic prices were relatively weak,offtake was sluggish and there was price disparity between domestic andinternational market to the extent of $10 -20 a tonne.

Huge stocks of rapeseed/mustard at the hands of National AgriculturalCooperative Marketing Federation are expected to play a decisive role inestablishing a price sentiment in the country's vegetable oil market.According to Mr Ramamoorthy, in view of the international and domesticsupply factors, the Indian oilseeds and oils market situation appearedgloomy.

The only factor that can change the equation and sentiment is the weather.

If the weather in the US, China and India holds well and oilseedsplantings progress satisfactorily, the sentiment will turn even morebearish. However, any hiccups in weather, especially in the US canpotentially rein-in the imminent slide and provide some kind of support.

1 million = 10 lakh