Stung by the twin woes of erratic weather and aggressive replanting, palm oil traders are bracing for a supply squeeze in the months ahead, spurring importers to stock up ahead of an anticipated rise in demand. This is already reflected in Malaysian prices palm is one of the biggest gainers this year, soaring 42 percent and analysts say any further rise may force Indian and Chinese buyers to shift to soy oil, which has risen at a much lower rate.
Analysts said top producers Indonesia and Malaysia could see palm output fall in April-June, rather than a gradual increase as usually expected, driving total stocks down by more than half to below 2.5 million tonnes by the end of the period, from a record 5 million tonnes in November.
"We need to cover quickly especially if this supply tightness comes into play," said Sandeep Bajoria, an Indian vegetable oils trader. "If things get too bad, I won't be surprised if soy oil takes more market share from palm oil in the future."
While palm has gained 20 percent just this month on heavy buying from India, China and Europe, soyoil has struggled to keep up, rising only 10 percent in 2009. Also, India recenty removed its duty on soy oil imports, bringing it on par with crude palm oil and making it an attractive option.
In addition, palm oil stocks in Malaysia hit a 20-month low by the end of March. "Chinese traders may also shift to much cheaper soy oil if palm oil supplies dry up. So hopefully there might be a breather for stocks and prices," said a Kuala Lumpur trader.
Analysts said India, the world's second-largest consumer of vegetable oils after China, has only covered 20 percent of its crude palm oil requirements for May, which is generally 100,000 to 200,000 tonnes monthly, sparking some panic. In addition, India will start buying aggressively to meet a surge in demand, which normally happens during the Hindu festival months from September to November.
"We could see prices go up to 2,600-2,700 ringgit in the near term due to bad production," said S. Paramalingam, executive director of Pelindung Bestari. "The markets have tested the 2,550 level this week, so technicals are gearing for another rally." Traders said even if some importers switched to buy a few cargoes from Indonesia to cover immediate needs because of high Malaysian prices, that will not do much to ease Malaysian prices.
"Our port infrastructure is not ready to handle too many vessels," said Derom Bangun, vice-chairman of the Indonesian Palm Oil Board. "If suddenly five vessels are diverted from Malaysia to Indonesia, we are not ready to accept them." Unlike most years, all oil plantations are contributing to some output shortfall. Mature ones face biological stress and are being replanted, while harvests from younger trees have recently been poor, with rains hampering early pollination.
"Lots of rain, less fertiliser use and biological tree stress after months of good harvests are the culprits and all we can do now is watch and hope it's not too bad," said Velayuthan Tan, chief executive of Malaysia's IJM Plantations. Malaysia has approved the replanting of 110,000 hectares covered with oil palms above 25 years old, accounting for about half of the industry-wide scheme started in October that aimed to remove 700,000 tonnes of palm oil, while stocks swelled.
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