By Shie-Lynn Lim
Of DOW JONES NEWSWIRES
KUALA LUMPUR (Dow Jones)--Crude palm oil production in Indonesia and Malaysia may rise further in the second half of the year, pushing inventory to a level where it could start weighing on prices, a Netherlands-based analyst at Rabobank International said in an interview.
"Prices are definitely vulnerable to further declines given high volatility in the market now. The global economic (outlook is still) uncertain. On the production front, yields will increase in the second half of the year... depressing prices," said Chan Wei Siang, analyst at Rabobank International's Food & Agribusiness Research and Advisory.
Malaysia and Indonesia together account for 80% of the palm oil produced globally.
CPO prices are now around 13% off this year's highest level at MYR2,722 a metric ton, reached in early March. The benchmark September contract on Malaysia's derivatives exchange ended MYR28 or 1.2% lower at MYR2,377/ton Tuesday.
Southeast Asia's total palm oil stocks are likely to be around 3.6 million tons now as output in June would have risen significantly, traders in Malaysia and Indonesia estimated. Unofficial projections put current Indonesian stocks around 2 million tons. Malaysia's official June estimates will be released in the second week of July.
According to market participants, output in Malaysia would have risen some 15% in June while in Indonesia the gain was as much as 20% on month.
But it may not all be bad news for producers. "Though output will increase in the second half, (overall) growth in CPO output will likely be muted in 2010 due to the residual effect of El-Nino," Chan said.
Even though the El-Nino has officially ended, its impact can last six to ten months as oil palm trees continue to remain under stress caused by dry weather during the El-Nino months.
Total CPO production in 2010 may rise by only 3% or 500,000 tons to 18.1 million tons in Malaysia, while Indonesia's output could rise by 7% or 1.5 million tons to 22.4 million tons, he said.
Narrowing Discount To Soyoil Prices A Drag On Palm Oil
The record high South American soybean harvest this year has already reduced soyoil prices, narrowing the price gap with the lower-priced palm oil. In some cases, palm oil is even trading at a slight premium to soyoil.
"The narrow price differential has made soyoil very competitive (in international markets) with more buyers making the switch from palm," Chan said.
Palm oil traditionally trades at a discount of more than $100/ton to soyoil, but that has narrowed to the point where palm olein now trades in a range that is just $20 above or below soyoil.
"India, being a very price sensitive market, saw an 18% drop in palm oil imports over the first five months, while soyoil imports rose 59% as processors substitute more palm oil with soyoil," he said.
China, another major vegetable oils buyer, also would have bought more soyoil, had it not been for the ongoing dispute with Argentina, he said.
"If soybean oil prices remain around current levels (37-38 cents/pound), we would likely see an increase in crushing which will place further pressure on palm oil exports," Chan said.
By Shie-Lynn Lim, Dow Jones Newswires; +603 2026 1233;