Malaysian currency holds key to palm oil in 1998

Malaysian currency holds key to palm oil in 1998

KUALA LUMPUR (Reuters): The outlook for Malaysian palm oil in 1998 can be summed up in one word -- currencies.

Crude palm oil prices have surged about 70 percent since July, moving steadily up as the Malaysian ringgit and Indonesian rupiah have slumped against the U.S. dollar.

The declines in the regional currencies' values make exports of palm oil products from those countries more competitive.

Analysts and traders say local prices will continue to rise if, as many predict, the currency crisis continues into 1998.

"With regional currencies hitting new lows in 1997, we are optimistic that the crisis will continue into next year, benefiting palm," an analyst at a local brokerage firm said.

"If the crazy ringgit is not going to stabilize or ease off, we can see prices surge across the resistance psychological level of 2,000 if the ringgit hits 3.95 to 4.00 (per U.S. dollar)," he said.

Another factor that could underpin prices is the anticipated draw-down of huge carryover stocks as production slows and exports pick up.

Before the currency crisis struck, the Malaysian ringgit had long traded in a narrow band around 2.50 to the dollar.

The Malaysian currency hit a record low of 3.93 to the dollar on Dec 15, down more than 37 percent since July, and some commodity analysts expect the ringgit to slump to 4.02.

Palm oil prices have moved almost in lock step with the dollar's rise against the ringgit.

On July 1, the benchmark September palm oil futures contract finished at 1,162 ringgit per ton. On Dec 19, the March futures contract ended at 1,985 per ton.

Some traders said that as long as the ringgit trades between 3.50 and 3.80 to the dollar, palm oil prices should trade above 1,700 ringgit in the first half of 1998.

"If currencies stabilize at certain levels, then people will stop speculating in the palm market," the analyst said.

"If not, the palm market is seen turning into a casino den with people taking advantage of the ringgit to speculate, ignoring fundamental factors," he said.

"I think that export business will increase given the depreciation of the ringgit which makes palm oil cheaper in terms of ringgit," said another senior trader.

"To what extent exports are higher, I don't know. Demand will be from traditional buyers."

India, Pakistan, China are regular top buyers of Malaysian palm oil. Latest official figures show exports in the first eight months of 1997 rose to 4.74 million tonnes from 4.54 million in the same period last year.

"The currency crisis is a big factor because it has made local exports more competitive," said a trader. "There is a lot of knee-jerk reaction to the currency, which is making new lows every day."

Traders said the market could turn back to fundamentals if regional currencies stabilize at sustainable levels.

"Look at Malaysia, the stock buildup there is bigger than expected," said a dealer in based in Singapore said. "It is thought to be 700,000 tonnes carried over to next year, but now it looks likely to be one million."

Malaysia's Palm Oil Registration and Licensing Authority (PORLA) announced a higher end-November stock of 1.14 million tonnes after private forecaster Ivan Wong issued a report of 1.06 million.

Malaysian traders are optimistic stocks will fall below one million tonnes in early 1998 as the effects of the smog that covered the area for much of the last half of 1997 are felt on output.

Analysts expect Malaysia's 1998 palm oil production to fall by 10 percent from an estimated 9.1 million tonnes.

"The impact of the smog will be felt around January, February. I think output in February could drop by about 30 percent," an official at a production house said.

The smog from forest fires in Indonesia which blanketed large parts of Southeast Asia for many months this year blocked sunlight from reaching the leaves, slowing the ripening of fruits.

A shortage of labor during holidays for the Chinese Lunar New Year and Eid al-Fitr festivals could also slow down production in January and February, analysts said.

A recent report by Worldsec Research said palm oil yield growth in Malaysia was expected to drop to 1.1 percent in 1998 from three percent this year.

"Quality of oil is not very good and has resulted in a lower oil extraction rate. This is caused by the smog," said an industry source. "The El Nio-induced droughts are going to lead to lower yields in the coming year."