Malaysia's record CPO output pressures prices

Malaysia's record CPO output pressures prices

KUALA LUMPUR (Dow Jones): Malaysia's palm oil output is expected to hit yet another record high this year, prompting industry participants and the government to step up efforts to seek creative ways to boost usage, and prevent a further slide in prices.

Palm oil prices are set to be lower on average than in 2000, as a result of rising output and high global inventories, M.R. Chandran, chief executive of the Malaysian Palm Oil Association told Dow Jones Newswires in a recent interview.

"We have good crops coming in from all the regions. We may have to revise the production forecast upwards this year," Chandran said. The MPOB is a growers' association.

Malaysian output, which is seeing a sharp increase in recent months, could easily reach between 11.5 million and 11.7 million metric tons, up from 10.84 million tons in 2000, Chandran said. Malaysia, the world's largest producer of palm oil, produced 10.55 million tons in 1999.

Much of the increase in output this year will come from East Malaysia, particularly Sabah. The area under oil palm cultivation in Sabah and Sarawak has gone up substantially in recent years, leading to a steady increase in production.

Reports from Sabah indicate a 40 percent to 50 percent on- month increase in production in May alone, Chandran said.

A senior official at the MPOB, however, said the government will continue to maintain its forecast at 11.2 million tons for this year. Private traders, meanwhile, have said production will hit 12 million tons.

The association is expecting crude palm oil prices to average between 760 ringgit a ton and 780 ringgit a ton this year, down from an average of 993 ringgit on in 2000.

CPO for spot delivery was offered Thursday at 790 ringgit a ton, free-on-board Malaysia.

Chandran said despite the recent price gains in the cash and futures market, the price outlook is still grim because of a glut in the global vegetable oils market.

In Malaysia alone, with last year's carry-over stock of 1.42 million tons, the palm oil industry is faced with the task of finding buyers for over 13 million tons of palm oil this year.

Indonesia's production is also expected to be higher this year, touching at least 7 million tons, up from 6.5 million tons last year, he added.

Despite early setbacks, the government and the industry will continue with their efforts to find alternative uses for palm oil.

After unsuccessfully trying to use CPO as fuel in state utility Tenaga Nasional Bhd.'s power plants, the Primary Industries Ministry is now trying to encourage smaller generation units in Sabah and Sarawak to use a mix of refined palm olein and diesel as fuel.

The government has scheduled a meeting of experts and industry associations Friday, where the revised plan will be discussed.

Chandran said there are about 70 such generating stations in East Malaysia, catering to the needs of smaller towns. A large majority of these are run by Tenaga.

"Even if a 50:50 blend (of olein and diesel) is used, it could easily take 20,000 to 30,000 tons of palm olein (out of the market) a month," he said.

At Friday's meeting, the government is also expected to discuss the possibility of subsidizing the usage of the mix to make the plan financially attractive.

Similar efforts at finding alternative uses for vegetable oils elsewhere in the world will also contribute to better prices in the long run, he said.

"The European Union is coming out with a manifesto on biodiesel" soon he said, adding that if European countries provide incentives to biodiesel soon, this could help reduce global soybean oil stocks.