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Commodities

Asian palm oil futures hit near 2-year high on supply fears

Falling output in Malaysia and surging China imports have lifted prices

Oil made from palm trees is in demand in China and Indonesia.    © Reuters

TOKYO -- Asian palm oil prices hit a near two-year high early in December, as Malaysian supply is expected to fall while demand in China and Indonesia is surging.

Benchmark near-term palm oil futures traded at around 2,630 ringgit ($632) per ton on Bursa Malaysia in early December. That was a 10% jump from a month ago and the highest level in about two years.

Malaysia -- which supplies a quarter of global palm oil -- is expected to produce 20.33 million tons in the production year to end-September 2020, down 2% annually. Malaysian farmers are said to have reduced the amount of fertilizer they use on palm trees, diverting resources instead to soybean oil, which is a palm oil substitute.

"Farmers are cutting the use of fertilizers and curb production deliberately in an effort to mitigate the impact of lower palm oil prices," said a purchasing manager.

Global output is forecast to grow just 2% or so on the year to 78.62 million tons, marking slower growth compared with the previous production year, which saw a 7% increase.

On the demand side, China's palm oil imports are expected to jump 5% on the year to 6.9 million tons in the current production year, according to research company Oil World.

With the outbreak of African swine fever, the number of pigs has declined in China, pushing down feed demand and soybean imports. Palm oil imports, on the other hand, have been increasing. In China, as in the case of soybean oil, palm oil is used for frying, and it is also used as a raw material for various processed products such as mayonnaise and margarine.

"Palm oil prices are expected to remain high as demand is likely to grow further later this month in the runup to Lunar New Year holidays in China," said Hideki Hattori, general manager of research and development department at Food Management Support, a wholly owned subsidiary of Japanese trading house Itochu. Lunar New Year falls on Jan. 25 2020.

The Indonesian government's plan to raise the percentage of palm oil used in biodiesel from 2020 has also pushed up palm oil prices.

Rising palm oil prices in Asia also affect Japan which relies on imports. Palm oil is now traded at around 162 yen ($1.50) per kilogram, but "we want to hike the price by about 10 yen per kilogram for the October-December quarter," said a representative at a Japanese palm oil producer.

If Asian prices remain high, an official at another Japanese oil maker said his company would have to hike prices significantly in the first quarter of next year.

But an employee at another oil producer said that prices would be capped because "consumers are expected to switch to soybean oil further, curbing the upside of palm oil prices."

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