March 8, 2017 8:55 pm JST

Palm oil prices may be headed for a sustained drop

KUALA LUMPUR (NewsRise) -- The outlook on palm oil has turned bearish for the latter half of the year and beyond as weather conditions improve and supplies grow.

Prices of the commodity are likely to decline from July with the pace of the decline accelerating next year, top global analysts said at an industry conference Wednesday.

Output from Indonesia and Malaysia, which together account for more than 80% of global palm oil output, is expected to recover as the effects of El Nino, a weather condition that increases heat and reduces rainfall, wear off.

Malaysia is the second-largest producer of crude palm oil after Indonesia. Palm oil and related products, ranging from snacks to soaps, account for 9% of the country's total exports.

Benchmark palm oil futures on the Bursa Malaysia derivatives exchange surged 25% last year, helped by shrinking supplies, boosting profits of companies such as Malaysia's Sime Darby and Genting Malaysia.

So far this year, prices have already fallen 8%.

Analysts attribute the fall to expectations of higher output and tepid demand partly because bumper crops of soybean and sunflower have lifted supplies of substitute oils.

In India, the world's largest edible oil importer, palm oil lost market share to other edible oils last year due to high prices, Bhavna Shah, country representative of the Malaysian Palm Oil Council in India, was quoted as saying in an UOB report.

Meanwhile, Malaysia's output of palm oil is expected to rise, recovering from last year's steep drop. James Fry, chairman of agri-business consultancy LMC International, estimates at least 19.9 million tons in output this year, although a strong yield of fresh-fruit bunches could lift palm oil production to 22.26 million from 17.32 million tons last year.

Palm oil prices have peaked and are unsustainable at current levels, Thomas Mielke, editor of Oil World and a top analyst, said at the conference. Although some recovery in prices is likely in the next three to six weeks, renewed weakness is expected end-April or May onwards, Mielke said. He expects prices to average 2,650 ringgit ($595) per metric ton in 2017 and 2,400 ringgit per ton or lower next year.

According to Dorab Mistry, director at India's Godrej International, palm oil prices could hit 3,000 ringgit per ton before moderating to 2,500 ringgit a ton by July. However, if the output recovery is weaker than expected, prices may hold around 3,000 ringgit per ton, he said. "I fear palm production recovery may take longer or (if new) weather problems develop," he added.

Although reports about a new El Nino emerging by the third quarter of 2017 are raising hopes for prices, such a development is unlikely to affect the supply recovery in the second half of this year, Ling Ah Hong, director of Malaysian plantation consultant Ganling, was quoted as saying in an UOB note. Production is likely to be hit only by end 2018 or 2019, Ling said.

Fry said palm oil futures are expected to average 2,500 ringgit and 2,250 ringgit per ton in third and fourth quarter, respectively.

Crude palm oil futures for May delivery closed up 0.4% at 2,871 ringgit a ton Wednesday.

--Jason Ng

 

 

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