March 15, 2017 8:42 pm JST

Malaysian palm oil futures rebound from five-month low, sharp gains limited

KUALA LUMPUR (NewsRise) - Palm oil futures on Wednesday rebounded from a near five-month low, but feeble demand outlook and prospects of stronger output recovery could limit sharp gains, analysts said.

The benchmark Crude Palm Oil Futures Contract on Bursa Malaysia Derivatives for May delivery rose 2.3% to 2,816 ringgit in Kuala Lumpur trading. CPO futures have declined close to 5% since Friday's dismal February exports data, extending this year's fall to nearly 12%.

"We believe our anticipation of palm oil production recovery will be offset by lower CPO prices in the absence of significant demand growth catalyst," said Hong Leong Investment Bank's analyst Chye Wen Fei.

As output picks up later this year, with lingering effects of drought-like conditions waning, palm oil prices are expected to fall further after gaining 25.1% in 2016. El-Nino weather conditions that raises temperature had hurt output of fresh fruit bunches of oil palm through past two years. With weather conditions returning to normal, yields of fresh fruit bunches are rising, which will swell stockpile and weigh on the prices.

Malaysia, the world's second-largest palm oil producer after Indonesia, lowered the export duty on the edible oil used in everything from lipstick to ice cream to 7.5% a ton in April, against March's 8.0% levy.

The country uses a multi-tier tax rate that ranges between 4.5% and 8.5% for exports of crude palm oil, and kicks in when prices exceed 2,250 ringgit ($502.3) a ton.

Inventory fell 5.3% in February on-month to 1.46 million tons, a little under market expectations of 1.48 million tons, while production declined 1.4% to 1.26 million tons from January. However, exports fell by 14% to 1.11 million tons, suggesting poor demand.

CPO prices are expected to stay firm until June before weakening in the second half of the year when "production recovers and inventory starts to pile up," said UOB Kay Hian's analyst Ooi Mong Huey, who predicts an average price of 2,600 ringgit this year and 2,500 ringgit in 2018.

The latest comments are largely in line with predictions made by top global palm oil analysts including Dorab Mistry, James Fry, and Thomas Mielke in an industry conference in Kuala Lumpur last week.

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.

If the output recovery is weaker than expected, prices may hold around 3,000 ringgit per ton, Dorab Mistry, director at India's Godrej International, said on March 8.

--Jason Ng

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