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Nikkei Markets

Malaysia's May palm oil inventory falls to 10-month low

Still worries over tapering demand cloud prospects of sharp uptick in price

KUALA LUMPUR (Nikkei Markets) -- Malaysia's palm oil inventory fell in May to its 10-month low level as higher exports outpaced production, official data showed Wednesday.

Despite a decline in palm oil stockpile for three months in a row, analysts said concerns over tapering demand would weigh on prices of the widely used commodity.

Stockpile in Malaysia, the world's largest palm oil producer after Indonesia, fell 10.3% to 2.45 million tons in May, according to the Malaysian Palm Oil Board. Exports grew 3.5% year-on-year to 1.71 million tons, while output rose 1.3% month-on-month to 1.67 million tons.

The data is provisional and may be revised later.

The latest data was largely within market expectations. Buyers began stocking up the versatile commodity used in everything from cooking oil to cosmetics in May, although production will likely ease in June due to the Eid celebration that marks the end of Ramadan fasting period, analysts said.

"Production will decline in June because of holidays in Malaysia and Indonesia, before picking up in July or August," said TA Securities Analyst Angeline Chin. She is reviewing her crude palm oil price forecast for a likely cut from the current 2,400 ringgit ($577.3) per ton level, Chin added.

The most-traded crude palm oil contract for August delivery fell as much as 1.7% to 1972 ringgit Wednesday on Bursa Malaysia Derivatives. So far this year, palm oil prices have declined more than 6% even as inventory eroded from a record high in December 2018.

Consumption of palm oil usually increases during the holy month of Ramadan as Muslims all over the world break their daily fast in the evening often with lavish spreads.

Still, supplies remained ample. Moreover, the European Union's proposal to limit use of palm oil in biofuel over allegations of deforestation and unsustainable farming practices weigh on the future demand prospects of the edible oil.

"Biodiesel export rose nearly threefold in May and is expected to continue to post strong growth in 2019," said Sathia Varqa, co-founder of Singapore-based Palm Oil Analytics.

In terms of markets, shipments to India, the world's largest importer of vegetable oil, edged 0.9% higher to 528,599 tons, while exports to the E.U. surged 43% to 200,765 tons ahead of the biofuel limit regulation.

Prices of crude palm oil will likely remain under pressure in the second half of the year in part due to record production of competing oilseeds, MIDF Amanah Investment Bank's Analyst Martin Foo wrote in a June 7 note to clients.

That could lead to depressed earnings for plantation companies, especially those with significant upstream operation, he said, noting that six out of nine plantation companies covered by MIDF have performed below expectation in the first quarter of the year.

Shares of Sime Darby Plantation, the world's largest palm oil producer by acreage, fell 0.4% to 4.55 ringgit on Wednesday, while the broader Bursa Malaysia Plantation Index, which tracks palm oil producers, fell 0.3%.

--Jason Ng

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