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CPO may climb above RM3,000 a tonne

This is written by my colleagues Zaidi Isham Ismail and Lidiana Rosli.

KUALA LUMPUR:  Crude palm oil (CPO) prices may hit as high as RM3,500 a tonne by June if severe drought caused by a possible El Nino phenomenon parches crops in Southeast  Asia this year.

London-based Godrej International Ltd executive director Dorab E. Mistry said there could be two scenarios: El Nino envelops the region or the situation returns to normal with rainfall, which could see CPO prices hover between RM2,600  and RM2,900 a tonne between July and  October.

“Sabah had the lowest rainfall in 29 years and this could hurt palm oil production in late 2014,” Mistry told about  2,000 participants from more than  50 countries at the  25th Palm and Lauric Oils Conference and Exhibition POC2014 held here, yesterday.

Mistry said the heat wave is also possible in Brazil, unleashing a rally in everything from corn to coffee and sugar as dry weather threatens crops in the South American state, potentially stoking global food inflation. 

“This will kill all discretionary biodiesel global demand of 6.5 million tonnes. The dry weather must end in the next two weeks for if it doesn’t, then CPO prices can hit RM3,500. If the normal rainfall pattern returns, all forecasts of CPO production and price will have to be revised and there is a 30 per cent probability that it will fall to RM2,400 a tonne.”

  He said Indonesia’s biodiesel mandate is a “game changer” and will keep palm prices relatively high for a long time as Indonesia tweaks its biodiesel policy all the time. “Indonesia’s biodiesel mandate is 3.1 million tonnes of palm oil this year and could rise by an additional one million tonnes,” said Mistry.

  He said global cooking oil demand will probably increase by about 6.5 million tonnes in the 12 months from October 2013, while supplies are set to expand 6.8 million tonnes, adding that until July, world vegetable oil stocks, particularly palm oil, will remain very tight,” he said.

Mistry said Indonesia’s palm oil output is expected to hit 30.5 million tonnes in 2014 compared with 27.5 million tonnes last year, while Malaysian production is expected to hit 19.7 million tonnes from last year’s 19.5 million tonnes. 

 LMC International Ltd chairman Dr James Fry said CPO prices could reach US$1,030 (RM3,368) a tonne by middle of the year due to the current drought, which will cut Southeast Asia’s output in the third quarter. 

Rising biofuel mandates in countries such as Malaysia, Indonesia and Brazil will also add to the market tightness.

  “Fears about the future of the vegetable oil industry is one of the main drivers in pushing the prices, in either north or south direction and, thus, the pricing of vegetable oils will remain volatile in 2014. However, I’d like to warn against traders not to be too greedy with their CPO pricing as this would lead to importers potentially switching to other oils such as sunflower oil, soya bean oil and canola oil,” Fry said.  

In his presentation entitled “Biofuel Policies, Export Taxes and Competition Between Vegetable Oils: Lessons for 2014”, Fry said the current drought in Southeast Asia will continue to dictate the market to a certain extent.

  He said fears about the future are now driving prices.  “Despite large areas reaching maturity in Indonesia, the net effect of these factors is that it will be able to reduce stocks at a faster rate than normal by middle of the year.”

 Indonesia and Malaysia are the world’s top two producers. Fry said the market today is anticipating sharper reduction in stocks than usual. He said Southeast Asian CPO  export taxes also had a far-reaching implications on the price structure of world palm oil products.

As CPO export tax rates are higher than refined palm oil, Indonesia achieved its initial objective encourage downstream investments, notably in cooking oil and oleochemicals. 

 ISTA Mielke GmbH Oil World executive director Thomas Mielke said all signs are indicating that crude palm oil (CPO) prices are expected to breach the US$1,000 (RM3,274)-a-tonne mark. He attributed his projection to unusually dry weather, a possible El Nino which can bring drought, and biodiesel mandates.

Malaysia’s CPO prices have been hovering  between RM2,200 and RM2,500 a tonne for the first 10 months of last year before it climbed to a higher bandwidth of RM2,500 and RM2,700 a tonne. Since this week, it spiked to break the RM2,800-tonne mark. 

Mielke said the current rally could see CPO prices scratch the US$1,000-a-tonne mark in the next four to eight weeks, provided the dry weather in the region persists. “If the rain falls in the coming weeks in Malaysia and Indonesia, I see limited upside in prices,” he said.

Mielke added that oil palm yields may suffer later in 2014 after unusual dryness in some planting areas  in Malaysia, Thailand  and Indonesian in the last two weeks. He said CPO prices may rise on concerns that stressed trees will produce less and exports could decline later in 2014, its first fall in 16 years.

  The Hamburg-based researcher said shipments are already slowing down due to lower output and this will support prices. “Bad weather could complicate an already  tight world supply scenario… it’s not El Nino yet and something is cooking up. A five per cent yield-loss in Southeast Asia equals to 2.7 million of palm oil, creating severe impacts on supplies and prices on all of the world’s 17 edible oils and fats,” Mielke said.

  He said palm oil production was boosted four times in the past 20 years — from 14 million tonnes in 1993 to 58 million tonnes in 2014 — of which Malaysia’s production will reach 19.6 million tonnes, while Indonesia’s will reach 30 million tonnes. He also said palm oil demand will always be strong as the world will need  80 million tonnes by 2020.

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