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."