RI's palm oil output may hit 9.9m tons this year

RI's palm oil output may hit 9.9m tons this year

Dow Jones Kuala Lumpur

Palm oil production in Indonesia, the world's second largest producer of this commodity, may beat initial projections by rising to around 9.9 million metric tons this year, said the head of Indonesian Palm Oil Producers Association.

But despite the upward revision, the forecast is still considered friendly for prices, traders said, as there had been some recent talk in the market that production would exceed 10 million tons.

Derom Bangun, chairman of the palm oil association also known as GAPKI, said the forecast for 2003 production was raised in line with an upward revision in the estimated 2002 output to 9.2 million tons.

Good weather and improved yields will also help boost production by 600,000 tons this year, he said.

"For 2003, we had initially estimated production of 9.6 million tons. But after taking into consideration the weather and the figures for last year, we think that this year's production may be slightly higher than (the initial estimate). It can be something like 9.8 (million) or 9.9 million tons," Derom told Dow Jones Newswires in an interview.

The projected output will depend on continued ideal weather for the rest of the year, he said, adding that so far, weather conditions in oil palm growing areas have been normal.

Exports of palm oil are also expected to rise in 2003 while domestic consumption is likely to remain flat at 2.9 million tons, he said.

"Domestic disappearance will be about the same, so most of the production will go towards exports. If last year, exports were 6.3 million tons, this year, they may be something around 6.8 million tons," he said.

Rising production in Malaysia and Indonesia is a major concern among market participants and has been the main cause for the recent steep decline in palm oil prices in Malaysia.

The benchmark October crude palm oil futures contract on the Malaysia Derivatives Exchange tumbled to as low as 1,272 ringgit (US$334.7) a ton last week, its lowest level in 14 months.

With the seasonal peak production period approaching, high output would put pressure on palm oil prices in the second half of the year, Derom said.

Still, he said there was a chance that demand may be strong enough to absorb the increased supply.

"India and China are buying more now than they have done in the previous months. Production is on the increase, but if demand is also on the increase, then prices can stay at current levels of around 1,400 ringgit to 1,500 ringgit," he said, referring to current prices in the cash market.

It may take Indonesia another five to six years to catch up with Malaysia's palm oil production, Derom said.

Malaysia produced about 12 million tons in 2002 and is expected to see an increase of another 1.0 million tons or more this year.

An economic slowdown as well as political and social instability have hampered expansion and investments since the late-1990s, slowing the growth of Indonesia's palm oil industry.

But now, there are signs that conditions in Indonesia are improving, pointing to a promising future for the industry, Derom said.

"There is now a climate for investment, but it will take one or two years for large companies to really start investing. The real growth may be seen next year or in 2005. So, maybe in 3 to 4 years from that time, Indonesia can reach the same level of production as Malaysia," he said.