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Oil palm industry: Abundant supply in 2012, but prices remain volatile

by Chai Li Tiing. Posted on December 29, 2011, Thursday

PLUNGING PRICES: Photo shows a plantation gathering oil palm fruits at a Malaysian site. Given the diminished downside volatility amid the limited upside due to lacklustre demand and abundant supply expected for next year, OSK Research predicts that the price of palm oil will enter a period of dull action as it continues to bottom. — Reuters photo

KUCHING: The oil palm plantation industry is set to see an increase in supply of 2.7 million tonnes next year, paving the way for a year of abundant supply boosted by favourable weather conditions, increasing yield from young trees as well as newly mature areas in Indonesia.

OSK Research Sdn Bhd (OSK Research) stated in a research note that new planting for most big players in Indonesia had peaked in 2007; thus, should be reaching maturity this year.

This had helped to fuel production growth, which was believed to continue its acceleration in the next four to five years.

“The demand for edible oil from China and India had been relatively weak this year,” noted Gan Jian Bo, an analyst from the research house.

According to OSK Research, China’s edible oil purchases fell by 7.9 per cent in the first nine months of 2011 to the lowest level since 2005. India’s edible oils purchase, on the other hand, dropped seven per cent. Crude palm oil (CPO) was up 3.1 per cent due to its wide discount to soybean oil.

“However, the discount had been much narrowed since,” Gan stated during the telephone interview.

Despite 2011’s bumper crop, OSK Research believed that the drop in production thereon would be limited, as most parts of Kalimantan experienced a decline in the production for the second half of this year due to the tail-end effects of the 2009 drought.

The lower production was believed to indicate that the trees in the area had had their rest and the opportunity to rebuild their reserves, it explained.

Given the weak price outlook, palm oil prices should rightfully have fallen to even lower levels, according to the report.

“Any price dips below the RM3,000 per tonne level had not been accompanied by follow-through selling or any additional selling to push it down further,” Gan underlined.

The volatility in palm oil prices was said to have eased and the commodity had fallen to price levels where it tended to bottom out.

Given the diminished downside volatility amid the limited upside due to lacklustre demand and abundant supply expected for next year, OSK Research predicted that the price of palm oil would enter a period of dull action as it continued to bottom.

This should follow the current episode of CPO price strength, which the research house said was seasonable and believed would be sustained into early first quarter.

“Production would likely pick up again in the second half, peaking between July to November,” Gan explained.

OSK Research thus maintained its view that the 2012 average CPO prices would be lower than in 2011 when prices were boosted by poor production in the first quarter. However, seeing recent price actions, it raised its average CPO price assumption from RM2,700 per tonne to RM3,000 for 2012.

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