Production slump brings the Malaysian palm oil traders bullish

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Palm oil rose to a two-month high as concerns about a fresh wave of monsoon flooding in Malaysia pushed prices higher. The market has been boosted by the effects of floods in Malaysia, the second-largest producer, since late December. A fresh weather warning from the country’s meteorological agency on Wednesday for thunderstorms and heavy rains further raised concerns about disrupted harvests and logistical issues. After the deluge, the reckoning. Palm oil output in Malaysia fell by the most in eight years after floods hit plantations in the second-largest producer, according to official data that showed a bigger decline than expected.
CIMB’s regional head of plantations and deputy head of research Ivy Ng told The Borneo Post her views that this was a ‘natural event’ as the inventory figure is broadly in line with the research houses and markets forecast.

“We don’t expect this event to be a key driver for CPO price or share prices of palm oil players in the near term,” she said in response to queries via email.

“With regards to the flood, our view is that players impacted by the floods may post weaker earnings as the rise in selling prices for CPO may not sufficient to offset the drop in output due to the flood.”

Malaysia and top producer Indonesia together supply 86 per cent of the world’s palm oil, US Department of Agriculture data show. Output usually declines during the rainy season on the Malay peninsula, with harvests peaking from July to October. In January and February 2014, the crop was hurt by the worst dry spell for that time of year since 1997. Flood damage reduced Malaysian output to 1.36 million tons in December, the lowest for that month since 2010 and a 22 per cent slump from November, the biggest for any month since December 2006, board data showed yesterday. The decline reduced inventories for the first time in six months, they said. Palm-oil futures on January 9 reached RM2,383 (US$663) a ton, the highest since July, on the Bursa Malaysia Derivatives. Prices that touched a 2014 low of RM1,914 on September 2 have climbed 3.8 per cent this month after a 4.3 per cent gain in December. The oil may average as much as RM2,500 in 2015, Kuala Lumpur-based RHB Investment Bank Bhd estimates. 

Output tumbled 22 percent to 1.36 million metric tons last month from November, the biggest drop since December 2006, the Palm Oil Board said today. That compares with a 1.46 million-ton estimate in a Bloomberg survey last week. Reserves fell 12 percent to 2.01 million tons, smaller than the 2.05 million-ton median in the survey. Exports rose 0.4 percent to 1.52 million tons, while the survey showed a 2 percent drop. Output in Indonesia, the largest producer, is estimated to reach 31m tonnes this year, almost flat compared with an estimated 29.5m tonnes in 2014, according to the Indonesian Palm Oil Board. Production growth is limited due to adverse weather conditions while yields have fallen as trees have aged, and the younger generation of trees has yet to mature to an optimal production age.The Malaysian currency dropped as much as 0.8 percent to 3.5850 against the greenback, its weakest in 5-1/2 years. A weaker ringgit makes the ringgit-priced feedstock cheaper for foreign investors.    

"Palm's plus factors are the ringgit and the weather in the days to come," said a trader with a foreign commodities brokerage in Kuala Lumpur, adding that the weak ringgit could attract key buyers such as China to book more palm this month. Traders said this buying interest, alongside worries of tighter supply in December and January, had lifted spot month prices to a premium of around 12-16 ringgit over the benchmark contract. The benchmark March contract closed up 2.1 percent at 2,331 ringgit ($651) per tonne, after rising as much as 2,335 ringgit in late trade, the highest since Nov. 3. Total traded volume stood at 54,901 lots of 25 tonnes, much higher than the usual average of 35,000 lots.