The Hindu Business Line : Rising output puts palm oil under pressure

AFTER doggedly holding on to relatively high prices for several weeks, the palm oil market may be readying for a crash with rapidly rising production and trailing exports.

The indications are clear that Malaysian palm oil output would rise this year by as much as 1.5 million tonnes from last year.

If the weather continues to hold well in the US, the global vegetable oil market could find some major downward movement.

At the Bursa Malaysia Derivatives on Thursday, third month crude palm oil plummeted to close at RM 1,366 a tonne - after stubbornly clinging to the psychological price level of RM 1400 a tonne and above for a fairly long time even in the face of rising inventory. A further downward drift is seen inevitable looking at the demand-supply fundamentals.

The marked fall should, however, come as little surprise to those who have been closely monitoring crude palm oil production and export numbers.

According to current assessment, looking at the growth rates in recent months, crude palm oil output in Malaysia this year has the potential to far exceed 15 million tonnes and indeed register 15.5 mt and possibly reach 15.7 mt as compared with the initial expectation of about 14.5 mt.

Earlier, the Malaysian Palm Oil Board had projected 2005 production at a conservative 14.2 mt versus 13.9 mt in 2004. International experts such as Mr Thomas Mielke of the Hamburg-based Oil World magazine had forecast the output at 14.7 mt. The US Department of Agriculture had, however, seen production exceeding 15 mt.

Interestingly, peak production months for Malaysian palm oil are between April and September, and the market is exactly in the midst of the peak season.

According to Mr A.R. Ramamoorthy of A.R. International, a Hyderabad-based trade intermediary, in the least, Malaysian palm oil production this year would register 15.25 mt and if the rest of the peak production months continue to show robust increases, the total for the year could well end up in excess of 15.7 mt.

Sharing his detailed calculations with Business Line, Mr Ramamoorthy showed that Malaysia's closing stock for the year could be a record 1.65 mt even after export of as much as 14 mt.

The increase in production this year can be attributed to replanting of about two lakh hectares that took place in 2000 and 2001 when senile trees were felled as a response to low palm oil prices. The palm oil market at that time was going through a long bear phase with prices plummeting below RM 1,000 a tonne.

Belief is now increasingly gaining ground that the export numbers that were witnessed in recent months may not be sustained during the rest of the year.

In order to manage the tank-bursting inventory, Malaysians, it is widely speculated, are transferring stocks to other countries rather than actually selling.

Should that be even partly true, actual shipments of palm oil over the next quarter are likely to slowdown, adding to the already burdensome stock position at the origin. The crude palm oil market clearly looks overdone and it may be time for a clear downward correction.

The unusually large arrivals of palm oil into India during April and May should be seen in this context. Crude palm oil constituted 6.5 lakh tonnes out of the 10.5 lakh tonnes that arrived in the country during the last two months.

Imports took place at a time when domestic prices were relatively weak, offtake was sluggish and there was price disparity between domestic and international market to the extent of $10 -20 a tonne.

Huge stocks of rapeseed/mustard at the hands of National Agricultural Cooperative Marketing Federation are expected to play a decisive role in establishing a price sentiment in the country's vegetable oil market. According to Mr Ramamoorthy, in view of the international and domestic supply factors, the Indian oilseeds and oils market situation appeared gloomy.

The only factor that can change the equation and sentiment is the weather.

If the weather in the US, China and India holds well and oilseeds plantings progress satisfactorily, the sentiment will turn even more bearish. However, any hiccups in weather, especially in the US can potentially rein-in the imminent slide and provide some kind of support.

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