MARKET DEVELOPMENT
01-08-2001
Palm oil prices to climb higher
Kuala Lumpur, 7/31/2001(soyatech) - RISING global demand, compounded byfalling supply of edible oils, is likely to continue to push palm oilprices higher for the next year and a half.And as the leading producer of palm oil accounting for half the world'stotal supply, Malaysia can look to at least one bright spot in the economyas electronic exports continue to falter.Crude palm oil (CPO) prices have shot up from 10-year lows and doubledtheir levels from the start of this year.Most of the gains were seen in the last month, when benchmark three-monthCPO futures jumped from around RM800 per tonne to peak at RM1,200 pertonne last week before falling back closer to RM1,100. Prices recoveredthis week, and are expected to keep tracing a rising trend despite minorcorrections.A stronger currency for Indonesia, the next largest oil palm producer andMalaysia's nearest competitor, is expected to help Malaysian CPO prices inthe near term. A seasonal increase in demand over the next two months fromIndia in preparation for the Indian New Year, Deepavali, will also boostMalaysian CPO price, which is expected to be strongly supported at theRM1,100 levels, traders said.'I am revising my estimate of average prices up to the end of next yearfrom US$350 to US$400 per tonne,' said Hamdan Abdul Majeed, plantationsanalyst at HSBC Securities.Citing data from the trade magazine Oil World, Mr Hamdan said the combineddemand from the main palm oil consumers - China, India and Pakistan - isexpected to increase by close to 23 per cent to 10.6 million tonnes by2005. CPO production, on the other hand, is expected to slow in the mediumterm due to the downtrend in biological yields, slower to mature newplantings and lower yielding crops as a result of reduced fertiliser use.Faced with languishing prices and rising inventories over the last twoyears, palm oil producers resorted to reducing fertiliser use in order tocut costs.Malaysia's palm oil production fell by 6.1 per cent month-on-month in Junethis year, the first decline in three months. The Malaysian Oil PalmBoard's unofficial estimates on Tuesday put July's production at under onemillion tonnes for the first time in two years.Despite the fall in production, exports continue to increase, following an11 per cent rise in June.The mismatch in production and sales has helped reduce inventories.Malaysia's stock of palm oil peaked at 1.5 million tonnes last November,and fell to just over one million tonnes by June.Forecasters estimate current stocks to be around 0.95 million tonnes,three times the 0.3 million tonnes seen in the first half of 1998, whenCPO prices were RM2,400 per tonne.Malaysian Primary Industries Minister Lim Keng Yaik has exhorted producersto sell existing stocks instead of hoarding in the hope of getting higherprices. An extremely weak ringgit in 1998 - the RM-US$ exchange rates was20 per cent below today's levels - contributed to the high prices for CPO,which is traded in US dollars.The effect of rising CPO prices on actual economic growth will, however,be minimal. 'Palm oil accounts for 33 per cent of the agricultural sectorand 0.03 per cent of GDP growth,' said economist Lee Heng Guie of HLGSecurities. He expects the agricultural sector to grow by 5 per cent thisyear.Plantation stocks in the stock market will feel a more direct impact. Theentire sector is likely to be re-rated as companies revise their earningsupwards.An added bonus is the fact that as US dollar earners, plantations alsostand to gain in the event of a devaluation of the ringgit.Plantation companies expecting strong earnings in the current and nextfinancial year could see a bigger windfall if poor weather conditionsreduce soybean crops.'If El Nino hits the planting season this year and the next, prices arelikely to overshoot current forecasts,' said HSBC's Mr Hamdan, who has hadan overweight recommendation on the sector from as early as February thisyear.
