Palm oil set for strong bull run in 2002: Analysts
Palm oil set for strong bull run in 2002: Analysts
Denny Kurien, Dow Jones, Kuala Lumpur
After staging a recovery earlier this year following a prolonged slump, palm oil is set for a strong bull run in 2002, as a pickup in demand is expected to coincide with a cyclical drop in global edible oil production.
The commodity could really take off, industry participants and analysts say, if China fulfills its obligations as a new member of the World Trade Organization and boosts its import quota for palm oil next year.
"Palm would enjoy the cherry cocktail of lower production and lower competition from bean oil," said Dorab Mistry, director of India-based Godrej International Ltd. and a leading analyst on palm oil. "It's quite possible that the markets will display their usual irrational exuberance and rush toward 1,500 ringgit (US$394.7) a ton before sanity reverts," he added..
The benchmark February palm oil on the Malaysia Derivative Exchange was trading at 1,135 ringgit a metric ton around 0700 GMT (2 p.m. Jakarta time) Thursday. It hit a low so far this year of 695 ringgit per ton in February.
Other analysts agree that palm oil's recovery is well on track and could go on for another two to three years.
In a report released two weeks ago, J.P. Morgan Chase in Kuala Lumpur forecast crude palm oil, or CPO, prices to average 1,330 ringggit per ton in 2002 and 1,444 ringgit per ton in 2003.
Chetan Parikh, chief trader at Adani Global Pte. Ltd. in Singapore, said he expects CPO to average 1,350 ringgit per ton next year and trade between 1,000 ringgit and 1,700 ringgit.
"The outlook is very bullish for next year," Parikh said.
China's entry into the WTO will likely be the most significant factor affecting the edible oil industry's fortunes next year, traders say. When it joined the WTO, China agreed to raise its import quota for palm oil to 2.4 million metric tons in 2002 from an estimated 1.5 million tons this year. It also promised to gradually phase out the quotas over a five-year period ending 2005.
"Should China play the game by the rules, CPO futures are likely to scale 1,600 ringgit by March 2002," Godrej International's Mistry said, meaning China would have to issue all the quota levels it has agreed to in the first quarter of 2002. China could even replace India as the world's top palm oil importer, he added.
Parikh at Adani Global said rising prices are expected to change the purchasing patterns of big buyers in countries like India, who he said have been buying on a hand-to-mouth basis. He said the buyers will be compelled to cover forward requirements and build up stocks, fueling prices further. His company exports large quantities of palm oil to the Indian market.
The expected increase in demand comes at a time when edible oil supply is in deficit. The global edible oil market is headed for a net estimated shortfall of two million tons of oil this year, according to Mistry.
However, palm oil production is expected to be unchanged to slightly higher.
Derom Bangun, chairman of the Indonesian Palm Oil Producers' Association, or Gapki, said he expects Indonesian CPO output to rise next year from over 7.2 million tons this year. Mohd. Nafis Daulay, chairman of the Indonesian Association of Cooking Oil Producers, puts this year's output at 8 million tons.
Malaysian production is expected to be unchanged to a little lower next year. Output this year is forecast around 11.7 million tons, according to the Malaysian Palm Oil Association, an umbrella organization of Malaysian plantation companies.
The low prices of recent years have resulted in a substantial drop in the production of high oil-bearing seeds, analysts say.
"Low prices have done their job very successfully. As they say, the cure for low prices is low prices," said Mistry at Godrej International.