April 21, 2017 7:40 pm JST

Malaysian palm oil price sinks to 8-month low

Downward pressure expected to remain as production volumes rise

TOKYO/HONG KONG -- An expectation of rising palm oil production has pushed down the price of the commodity to an eight-month low. As favorable weather conditions in major export countries are anticipated to continue, analysts foresee that the downward trend will remain ahead.

Benchmark Malaysian palm oil futures dropped to around 2,490 ringgit ($566) a ton on Thursday, about a 20% decline from the recent high seen at the end of 2016.

Palm oil, used in products like margarine and detergent, is mainly produced in tropical Southeast Asian countries, especially in Indonesia and Malaysia. Production in Malaysia surged 20% from a year ago to 1.46 million tons in March, according to the Malaysian Palm Oil Board. Supported by favorable weather conditions, the country saw a 24% increase in production volume during the first three months of the year.

Last year, palm oil producers in Southeast Asian countries -- which provide 90% of global supply -- suffered from droughts related to the El Nino weather cycle. As a result, production volumes of palm fruits declined 6% from 2015, pushing the price of palm oil as high as 3,200 ringgit a ton in December last year.

As the impact of El Nino wears off, analysts expect rising production to continue and keep the price in check. "The palm oil futures curve is in steep backwardation in the coming months, as investors expect a further fall in prices," wrote analysts from Capital Economics, led by chief commodities economist Caroline Bain, in a note on Tuesday. Looking at the agricultural sector, "investors are negative on the prospects for some of the more tropical agricultural," the note said.

A dispute between the Southeast Asian producing countries and the second largest palm oil import market, the European Union, has also weighed on the price. Earlier this month, European parliamentarians requested the introduction of a single certificate scheme for palm oil imports to the EU and the phasing out of the use of the vegetable oil by 2020, saying that palm oil plantations in the region are causing environmental damage, namely "massive forest fires, the drying up of rivers, soil erosion, peatland drainage, the pollution of waterways and overall loss of biodiversity."

Officials from the two regions are set to meet to discuss the proposals in May.

Meanwhile, some analysts expect a pickup in demand. "We expect the recent downward pressure on crude palm oil prices to reverse, given the possibility for an El Nino to return in the second half of 2017," Andrew Franklin Hotama and Gregorius Gary, analysts with Bahana Securities, noted in a report earlier in April. The team added that an expected increase in palm oil consumption ahead of Ramadan, the Muslim holy month of fasting, could also ease the price decline.

Bahama Securities forecasts prices of crude palm oil to increase this year by 9% to $700 a ton compared to last year. This is also a 15% increase from the spot price of $608.6 per ton seen last Thursday.

(Nikkei)

Nikkei staff writer Mariko Tai in Hong Kong contributed to this story.

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