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India's demand spurt sparks hopes of firmer pricing

KUALA LUMPUR (NewsRise) -- A spurt in demand from India may help firm prices of palm oil, even as Malaysia's stockpile climbed to a fresh record high in October and shipments to other top importers slipped.

     Imports to India surged 59% in October from a year earlier and 24% month-on-month, according to Malaysian Palm Oil Board's latest data, ahead of peak demand during the Hindu festival of lights, or Diwali.

     The robust demand from India--the world's largest consumer and importer of palm oil--comes at a time when the commodity faces supply glut and lacklustre demand from other major markets such as China and Pakistan.

     "Demand from India was strong due to the Diwali celebration and weaker domestic oilseeds production," said CIMB Investment Bank analyst Ivy Ng. "It should be sustained because of bad monsoon this year."

     Crops in India, especially oilseeds and pulses, have suffered due to the El Nino weather pattern that weakened this year's annual monsoon rains to below long-term average. Nearly 60% of farm lands in India rely on annual showers for irrigation.

     Meanwhile, palm oil shipments to China and Pakistan have plunged 28% and 33% respectively in October from a year earlier while exports to European Union countries slipped 14%.

     "We expect export demand to improve in the coming months ahead of festivities as importers would take advantage of the lower crude palm oil price and weaker ringgit," said BIMB Securities analyst Law Mei Chi.

     Oversupply concerns have kept a lid on the commodity, and pressured earnings of companies like Sime Darby, the world's largest listed palm oil producer by acreage.

     Malaysia's October inventory rose 7.3% month-on-month and 31% on-year to 2.83 million tons as production growth outpaced exports while domestic consumption remained flat. Last month, Malaysia's Commodities Minister Douglas Uggah Embas had warned that palm oil stockpile could swell to 3 million tons in November if nothing was done.

     Palm oil prices have fallen 2.3% after last week's inventory data. The benchmark Crude Palm Oil Futures Contract on Bursa Malaysia Derivatives in Kuala Lumpur for January delivery ended Friday down nearly 2.0% to 2286 ringgit.

     Scientists have warned that this year's El Nino could produce one of the hottest weather since records began in 1950. El Nino is the usual warming of the Pacific Ocean that causes a shift of moist of winds away from their more typical patterns, resulting in lesser rains. The dry weather spells withers oil palm trees, hurting yields. Expectations of lower output of oil palm in Malaysia and Indonesia, which collectively account for 85% of global palm oil supply, helped lift prices off their six-year lows in August.

     Crude palm oil will probably average 2,200 ringgit a ton this year, said BIMB's Law. Year-to-date, palm oil averaged 2,185 ringgit a ton.

     Malaysia has announced a raft of measures, including partnering larger neighbour Indonesia to form an OPEC style body to help prop up prices of the commodity. The government also plans to raise palm oil's share in bio-diesel to manage inventory. Earlier, it launched a $23 million incentive programme to replant 83,000 hectares of unproductive and ageing palm trees in the country.

     Still, inventory could rise by another 1% in November before it starts easing in December following a decline in output, forecasts CIMB's Ng.

     "We expect planters to post weaker third-quarter earnings on a year-on-year basis" as rise in output will only partially offset the drop in prices, she added.

     Shares of Sime Darby were trading at 0.12% higher at 8.03 ringgit ringgit while the benchmark FTSE Bursa Malaysia KLCI was down 0.08%.

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