Palm oil prices 'may not recover before 2003'

Palm oil prices 'may not recover before 2003'

KUALA LUMPUR (Dow Jones): The bearishness in the palm oil market is far from over and any meaningful recovery can't be expected before the end of 2002, traders and industry experts say.

Participants at Commex Malaysia's Palm and Lauric Oils Conference 2001-02 were unanimous that production will be substantially higher this year. And if new markets are not found, prices could drop further than the current low levels.

"I don't expect much of change from now. We will be lucky if the (crude palm oil) price averages 750 ringgit (US$197) a metric ton this year," said P. N. Agarwal, managing director of Premium Vegetable Oils Bhd. in Kuala Lumpur.

Crude palm oil futures on the Commodity and Monetary Exchange of Malaysia closed lower Friday amid bearish forecasts emerging from the seminar and fears that a weaker rupiah could make Indonesian oil more competitive on the international market.

The benchmark May CPO contract closed at 813 ringgit/ton, down 5 ringgit/ton from Thursday after falling from an intra-day high of 832 ringgit/ton. Earlier in the day, the contract touched 803 ringgit/ton.

Despite intervention by Bank Indonesia, the rupiah plunged to a 29-month low Friday with the dollar rising to Rp 1 0,140 before closing at Rp 10,090, up from Rp 9,930 Thursday.

According to Derom Bangun, chairman of the Indonesian Palm Oil Producers' Association, or Gapki, palm oil prices will be little changed this year, with crude palm oil ranging between $220/ton to $260/ton, CIF Rotterdam.

"The highest price can be expected in 2004, and a significant increase may take place in 2003. From March 2001 to March 2002, the market will still be discouraged by the present bearish sentiment," he said.

"Overall the technical picture (for all vegetable oils) is very bearish. Prices could, at best, move sideways", said Jim Wyckoff, a technical analyst and president of Jim Wyckoff Enterprises in the U.S.

Malaysia's efforts to support palm oil prices may continue for a while, but prices will fall again when production picks up in April, said Dorab E. Mistry, director, Godrej International Ltd. in London. Godrej is a large consumer of palm oil.

Mistry said he expects the third-month CPO futures contract to remain within 850 ringgit/ton for the rest of the year.

Agarwal added the ongoing price support undertaken by the Malaysian government may not be sustainable in the long run. "If unexpected factors don't come into play, prices will drop further," he said.

Malaysia's government has been trying to support the market through a combination of efforts to find alternative uses for palm oil as well as government-induced buying on the open market.

Deputy Minister for Primary Industries Anifah Haji Aman said Thursday that the government would aggressively push ahead with a plan to convert 500,000 tons of crude palm oil into industrial fuel.

The government has set aside 500 million ringgit to be distributed among producers to encourage them to replant older estates and cut immediate supply. The plan is to give 1,000 ringgit for every hectare replanted.

Replanting brings down immediate production levels, and the moves are part of the government's efforts to reduce the overhang of palm oil stocks in the country.

In recent days, Commex traders have also noted increased buying interest from state-controlled Federal Land Development Authority, or Felda which itself is the largest producer of palm oil in the country.

"Things look unsustainable if the current low price is not corrected," said Yusof Basiron, director general of the government-run Malaysian Palm Oil Board. However, he added that if the replanting is taken up seriously, production could be reduced by about 200,000 tons a month.

Mistry said he expects Malaysian CPO production to hit a record 12 million tons this year, while Indonesia's production is likely to touch eight million tons, also a record. Malaysia produced 10.8 million tons last year while Indonesian production was around 6.5 million tons.

He said Malaysian palm oil stocks may hit 1.8 million tons by November 2001. Malaysia ended 2000 with a carryover stock level of 1.4 million tons.

Although other forecasts are much less aggressive, indications are that production will be much higher this year, despite the government's replanting initiative.

The Malaysian government has said it expects production to hit 11.2 million tons while the Malaysian Palm Oil Association's estimate says it could be nearly 11.7 million tons. Similarly, Gapki in Indonesia has projected production around 7.2 million tons this year.

To make matters worse, India, the largest buyer of palm oil, has raised the import duty on vegetable oils making palm oil less competitive compared with soybean oil.

On Feb. 28, India raised the import duty on all refined oils to 85 percent and all crude oils to 75 percent. Crude and refined soybean oil will, however, carry a lower duty of 45 percent under a World Trade Organization pact India agreed upon with the United States.

Mistry said there could be yet another upward revision in Indian taxes later this year. Even if that increase is less significant, it won't bode well for prices.

"This year is going to be bearish because you can't artificially support the market," said Hari Selvanathan, president of PT Agro Indomas in Indonesia adding he expects spot- month CPO prices to drop to 600 ringgit/ton this year, FOB Malaysian ports.