CPO prices to drop ahead of Chinese New Year

Zakki P. Hakim, The Jakarta Post/Jakarta

Ahead of lunar new year festivities, industries in China are reducing their activity, and this will eventually cut demand for certain raw materials including crude palm oil (CPO), thus weighing down on the commodity price.

Combined with a possible revaluation of the Malaysian currency and the northern hemisphere winter, reduced production activity in China may put more pressure on CPO prices that have already been in decline for some months.

Industry players now expect the CPO futures contract price to fall as low as 1,230 ringgit per ton (Rp 2,946 per kg) at the Malaysian Derivatives Exchange, where the global price is benchmarked, although they forecasted a rebound at the beginning of the second quarter.

"People in China usually observe the lunar new year for about a month. At least a week before and a week after (lunar new year), workers will take days off. Moreover, it is winter now, so naturally there is less activity," PT Lampung Interpertiwi's general manager Sukatono said on Thursday.

"The weakening U.S. dollar may also trigger a revaluation of the ringgit, adjusting upwards by an estimated 5 percent to 10 percent," Gabriela Gan, vice president of Malaysian trading firm TA Futures Sdn. Bhd. said.

She was speaking during Palm Oil Conference 2005: "Uses of CPO futures in trading, risk management, hedging and price forecast" in Jakarta.

A stronger Malaysian currency would make the purchase of ringgit-denominated CPO futures more expensive -- thus making the commodity less attractive -- as the product is sold in U.S. dollars on international markets.

Moreover, Gan predicted that production of soybean, a main substitute commodity for palm oil, was estimated to increase by 22 percent, making it easier for customers to find soybean than palm oil.

Gan calculated that soybean usage would increase to 29.8 percent of the existing stock from last year's 21.5 percent.

After Malaysia, Indonesia is the world's second largest exporter of palm oil, a raw material for, among other things, cooking oil, soap and detergent.

Output from the two countries is expected to make up about 85 percent of this year's global palm oil production.

Separately, Indonesian Palm Oil Producers Association (Gapki) chairman Derom Bangun said the country was expected to produce 11.6 million tons of palm oil this year, compared to last year's estimated 10.8 million tons.

Exports were projected to reach 7.8 million tons, up from last year's estimated 7 million tons, he said.

China and India are Indonesia's main CPO markets. Indonesia also exports to Pakistan, Bangladesh, the Netherlands and into new markets such as eastern Europe.

Mid last year, the price of CPO was quite high. At one point it reached 2,005 ringgit per ton, which was the highest level since January 1999.