Rise in palm oil prices likely to be 'moderate'

Palm oil inventories have been rising since January last year. While output from Malaysia grew only 1.2 per cent in the first nine months of this year, production from Indonesia (above), which accounts for 54 per cent of global supply, rose 16.7 per
Palm oil inventories have been rising since January last year. While output from Malaysia grew only 1.2 per cent in the first nine months of this year, production from Indonesia (above), which accounts for 54 per cent of global supply, rose 16.7 per cent in the same period. PHOTO: AGENCE FRANCE-PRESSE

Concern that the severe drought affecting growing regions will persist is bolstering palm oil prices despite low demand and near-record production.

Prices have staged a 15 per cent rebound over the past two months as the dry spell tightened its grip in key producing areas such as Sabah, Sarawak and Kalimantan, although any further rise will be hard won.

Even if the drought drags on into a repeat of the severe dry spell in 1997 and 1998, Credit Suisse Private Banking and Wealth Management expects only "a moderate price boost" for crude palm oil.

Crop yields may fall, but the decrease will be muted by "record inventory levels, lower biodiesel demand and high stockpiles of competing oilseeds", said the bank's South-east Asia equity analyst Suresh Tantia in a report last week.

So while market sentiment has been buoyed recently, Mr Tantia is advising investors to "stay on the sidelines for now". The dry spell looks more likely to turn around over the next few months, he said, in which case, prices will slide.

Palm oil inventories have been rising since January last year and are approaching levels not seen since 2012 due to the lack of demand from China over the past two years.

"Inventory days have jumped to 47 days of consumption from the historical average of 39 days," Mr Tantia noted.

And while output from Malaysia grew only 1.2 per cent in the first nine months of this year, production from Indonesia, which accounts for 54 per cent of global supply, jumped 16.7 per cent in the same period.

This was due to the aggressive expansion of Indonesian plantations about eight years ago, when prices reached a high of US$865 per tonne, well ahead of today's US$550 (S$761) per tonne. Palm plantations typically take seven years to mature, so Indonesia is on track for robust production.

The export picture looks unlikely to lift prices either.

India, the largest importer of palm oil, has been rebuilding edible oil inventories to take advantage of low prices, but Mr Tantia warned that demand could falter as stockpiles are already at five-year highs.

Palm oil producers could also lose their share of the vegetable oil market as soya bean prices have also fallen due to a surplus from South America and the United States. Traditional consumers in China and India may go the way of Pakistan and substitute palm oil with soya beans, noted Mr Tantia.

A version of this article appeared in the print edition of The Straits Times on October 20, 2015, with the headline 'Rise in palm oil prices likely to be 'moderate''. Print Edition | Subscribe