Strong Asian demand chasing limited edible oil supply may boost palm oil prices that have gained six percent in February, reflecting the appeal of food commodities at a time of shaky global growth and rising geopolitical tension.
Analysts and traders at an industry meeting in Kuala Lumpur are shifting their focus to demand from top buyers India and China with limited palm oil output growth in Southeast Asia helping a little to offset the shortfall in soyoil after drought in South America withered crops.
But they warned of greater volatility in Bursa Malaysia futures as top palm oil producer Indonesia's move to slash export taxes for the refined grade will shift demand away from second biggest supplier Malaysia and boost stock levels. "As things stand at present, this promises to be a year of two halves. The first half, at least until June 2012, promises to be extremely tight and bullish," analyst Dorab Mistry told the Bursa Malaysian Palm Oil Conference on Wednesday.
"For the second half, we shall have to see how production performs," added the analyst who heads the vegetable oil trading portfolio for Indian conglomerate Godrej Industries. Mistry said prices would hit 4,000 ringgit ($1,320) by the end of June due to low palm oil output cycle, strong demand from India in peak summer months and stocking by Muslim countries ahead of the fasting month.
His bullish outlook was shared by Thomas Mielke, head of Hamburg based research house Oil World, who said the decline in both global soybean and rapeseed output - the first time ever - would boost palm oil prices. "We will make a new record for the average of calendar year 2012 in palm oil and soybean oil. RBD palm olein for Malaysia could reach $1,180. Crude palm Rotterdam at $1,150," he said.
Mielke added Malaysian and Indonesian palm oil production were set to undergo a low output cycle after months of strong production recovery last year, further supporting prices. Analysts said Malaysian palm oil output would be mostly flat or slightly higher in 2012 compared with 18.9 million tonnes the previous year, Indonesian production is set to rise as more acreage comes into maturity.
"This means a global increase of approximately 2.3 million tones in 2012, this is not enough to offset insufficient production of other vegetable oils," Mielke said. Analysts and traders surveyed by Reuters at the conference saw palm oil prices this year hitting a record average of 3,430 ringgit, up nearly six percent from 2011.
GEOPOLITICAL CRUDE OIL? Apart from limited oilseed production, surging Brent crude oil prices - driven by fear of political instability from Iran's nuclear programme, could lift palm oil as the appeal of edible oil-based biodiesel grows. But James Fry, chairman of commodities consultancy LMC International, said political instability was overshadowing low demand and high stocks from the United States, the world's No 2 oil consumer, suggesting a correction might be imminent.
"The basic supply-demand data on petroleum imply that today's high prices are unjustified and are doing their job of boosting supply and slowing demand," he told the conference. Based on the Brent crude price of $125 per barrel, which Fry termed "friendly to palm oil producers", the futures market could range between 3,250 ringgit to 3,350 ringgit per tonne depending on Malaysia's stock level.
All the analysts expect Malaysia's stocks to rise as export orders shift to Indonesia where taxes for refined palm oil shipments were slashed and domestic refiners offer discounts owing to higher margins. "The Indonesian export subsidies will set the seasonal floor to Malaysian palm oil stocks at 1.85 million tonnes," Fry said. End-January palm oil stocks stood at more than 2 million tonnes. In the past, the floor for inventories in Malaysia - which publishes monthly data unlike Indonesia - hovered at about 1.3 million tonnes.
Indonesia's export tax change has been a hot topic at the price outlook conference with Oil World's Mielke saying "this government interference" would severely impact markets and margins for Malaysian palm oil firms this year. The tax change, implemented in September, also puts the spotlight on Malaysia's tax free crude palm oil export quota of about 3 million tonnes, which refiners say limits supply and further pushes up feedstock costs.
"The Malaysian government has signalled 'business as usual' in setting the crude palm oil tax-free export quota. I believe that Malaysian refined oil exporters will have to concede market share to Indonesia," Fry said. Mistry said Malaysia sticking to the tax free export quota could be "a clever strategy" if the government raised the quota from time to time, potentially boosting crude palm oil exports and lifting palm oil prices.
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