Malaysia palm oil faces difficult year in 1999

Malaysia palm oil faces difficult year in 1999

KUALA LUMPUR (Reuters): With the market awash with supplies, Malaysian palm oil could lose some of its shine in 1999 after a buoyant 1998, when local prices soared to a record high.

Analysts said a bumper crop and high carry-over stocks this year could put pressure on prices. Malaysia is the world's largest producer of the edible oil, followed by Indonesia.

"We could see prices moving in the lower range because overall we are seeing a good crop in palm and other soft oils in 1999," said an analyst at a local brokerage.

Analysts expect palm oil prices to hover in the 1,850-2,250 ringgit (US$486-$592) a ton range in 1999 against 1,990-2,557 in 1998.

Malaysia's commodity export earnings rose in the past year, thanks to sharp currency depreciation amid Asia's prolonged financial crisis.

Prices of Malaysian palm oil rose sharply after the start of the crisis in August 1997 to hit a record high of 2,557 ringgit a ton in May last year.

Palm oil's premium to soybean oil, its close competitor, widened to as much as $120 a ton, forcing many traditional palm oil buyers to switch to cheaper oils.

The price differential has since dropped to around $50 a ton, but traders said further drops were needed to lure back buyers.

"It will be better if premiums could narrow by another $20 to $30," said an industry analyst.

The global edible oils market is now under pressure from the bumper U.S. soybean crop. The latest estimates from the U.S. Department of Agriculture put the crop at 2.91 billion bushels, well in line with trade estimates of 2.93 billion bushels.

Malaysia is bracing for a big palm oil harvest.

Primary Industries Minister Lim Keng Yaik put Malaysian output at a record 9.2 million tons in 1999, up from 1998's drought-hit crop of 8.3 million tons.

Analysts said higher-than-normal stocks would add to the overhang.

"We may see carry-over stocks of around 750,000 tons this year as compared with 500,000 to 550,000 tons projected earlier," one analyst said.

Exporters are banking on improved Asian demand to help shore up prices.

S.K. Choo, marketing manager at palm oil refiner Josovina, said: "Except for Indonesia, Asian economies are seen bottoming out and picking up. So we expect demand coming back from these countries."

Traders said major users India and Pakistan also preferred palm oil to soft oils due to logistics. It takes about seven days to ship Malaysian palm oil to Pakistan, while American soft oils take 45 days to reach Pakistan.

Besides physical demand, Malaysia is also hoping for renewed foreign interest in its crude palm oil (CPO) futures market.

CPO futures trading on Malaysia's Commodity and Monetary Exchange (Commex) has shrunk as foreign players stayed away due to the introduction of capital controls in September.

The contract's open positions fell 37 percent in 1998 from a year earlier.