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El Nino not expected to hit robust Indonesian and Malaysian palm oil sectors.

THE ROBUST nature of the southeast Asian palm oil industry has been illustrated by the way the market has remained strong despite both the global recession and the arrival of weather phenomenon El Nino this year and its attendant drought conditions.

The straightforward consequence of this is that prices are set to remain reasonably high for the medium term, thanks both to El Nino, which means a lower harvest, and continuing high demand from India. Without El Nino, which reduces yields, production levels would be slightly ahead in 2009-10, according to economic consultants. These higher prices may, however, be marginally offset by the harvesting of new plantations in Indonesia planted in 2005 and 2006. One Kuala Lumpur-based analyst speaking to Oils & Fats International said that she did not expect this particular El Nino disturbance to be intense--certainly no worse than the serious 1997 and 1998 patterns--but she stressed rainfall levels are expected to decline by the end of this year.

One market analyst said any impact on yields would actually kick in early next year, because there had been several months of average rainfall in Malaysia. "When we speak to the companies and they say they haven't felt the effect of dry weather because the ground was still quite moist from the last rainfall," she added.

"Either way, this is unlikely to alter the market share of south-east Asian palm oil Indonesia accounts for 49% of global crude palm oil production, Malaysia for 41%," said new analysis from Frost & Sullivan, published this autumn.

"The latest information suggests we are due to have a mild El Nino," said Dorab E Mistry, a vegetable oil price analyst for Godrej, the oils processing group. "If that is the case, crude palm oil (CPO) production will suffer in the first half of 2010. The periods of dry weather in Indonesia and Malaysia will make sentiment quite bullish from October-November onwards. Depending on the strength of the El Nino, the rally tends to start around October-November if it is mild." According to Chris de Lavigne, a regional analyst with Frost and Sullivan, supplies will be cut in the 10-15% range, and prices are expected to go up based on shortfall in palm oil for market.

Indonesia is still the biggest palm oil producer in the world, with a projected production at 22.7 million tonnes this year, according to a JP Morgan economist. Indonesia has been undergoing an intensive palm planting campaign which has kept Indonesian production well ahead of Malaysia's anticipated 17.68 million tonnes this year; 44 million tonnes of crude palm oil are likely to be produced globally in 2010.

Indian demand will be a crucial price factor in the coming year. In 2008/2009, Indian imports and consumption of vegetable oil soared dramatically as a result of duty free imports and consequent low prices. "Low prices spurred per capita consumption in this quintessentially price elastic market," said Mistry. "It is now acknowledged that Indian per capita consumption has undergone a once-in-a lifetime upward adjustment of almost 1.4 kilos per head, as a result of the removal of import duty."

This is partly related to El Nino, with analysts predicting India will import 10% more crude palm oil from Indonesia in the coming 12 months to counter lower domestic production from a projected weak monsoon. Indian markets are also currently open--with crude palm oil import duties shelved last year now likely to stay that way because of the Comprehensive Economic Cooperation Agreement (CECA) it signed in August with the Association of South East Asian Nations (ASEAN). There has also been strong demand in Egypt, and Pakistan.

A good example of the potential power of Indian demand can be shown by the July price forecasts for Malaysia, which predicted average crude palm oil prices in the third quarter of 2009 would probably hit Malaysian Ringgit RM1,700 (US$484) to RM1,900 (US$541) per tonne. This was down from earlier estimates of RM2,000 (US$569) to RM2,200 (US$626) and the fall was blamed on unexpectedly high edible oils stocks in India and China. Nevertheless, according to Mistry, exports of palm oil from Indonesia and Malaysia reached 6.75 billion tonnes in 2008/2009; he predicted that Malaysian palm oil production would reach around 17.5 million tonnes, about 250,000 tonnes lower than 2008; he also announced revision of his estimate in Indonesian production from 22 million tonnes to 21.5 million tonnes. According to James Fry, chairman of London-based commodities consultancy LMC International, speaking at a palm oil conference in Indonesia, Malaysian crude palm oil futures could yet hit RM3,000 (US$856) if crude oil markets continue to rise. In September, the Maybank Investment Bank recently concurred with this view, again citing below average rainfall in both Indonesia and Malaysia, saying that production was likely to remain "subdued." "Our revised CPO price assumption for 2010 factors in a weak to moderate El Nino," said the company in a market statement. But should it materialise, CPO prices could touch RM3,000 per tonne and average higher for 2010. Export tariffs are also relevant: in 2007 the Indonesian government issued a new "progressive" tariff on export duties which states that CPO priced between US$1,100 and $1,200 per tonne will be charged a duty of 15% per tonne. The duty increases to 20% if the price is between $1,200 and $1,300 and to 30% if the price exceeds $1,300 per tonne.

On a wider level, projections for palm oil demand look good into the medium term. This is despite continuing infrastructure problems: plantation areas in Indonesia are divided into two parts, west and east. Most plantations are still focused in the west, which includes Sumatra, while the east, mainly Kalimantan on the island of Borneo, is hampered by a lack of infrastructure and management. Despite this, the Indonesian government has earmarked a further 33,000 square kilometres of Kalimantan for palm oil plantations. Yet new analysis from Frost and Sullivan, published this autumn, reported that the fatty acid segment of the southeast Asian market (where these refined products are largely produced from palm oil) earned revenues of US$1.85 billion in 2008 and estimates this to reach US$2.51 billion in 2015 due to its potential in other applications, pushing up exports. Meanwhile, the fatty alcohol segment, (another south-east Asian palm oil-based product), of the two countries earned revenues of US$652.4 million in 2008 and is likely to reach US$712.6 million in 2015 due to its increasing potential in the captive market. "Increasing global demand from industries such as pharmaceuticals, personal care, detergents, paints, cosmetics, food, plastics, and rubber, is driving the consumption of oleochemicals," said Sri Ganesh Janarthanan, a regional analyst for Frost and Sullivan Research. "Exports of oleochemicals are also on the rise as the products offered by many Southeast Asian participants, including those in Malaysia and Indonesia, are competitively priced and highly valued in the world market." Correspondingly, the demand for key ingredients such as fatty acids and fatty alcohol is expected to swell in Southeast Asia. "This market growth is also driven by the wide availability of raw materials; there is abundant supply of vegetable-based raw materials such as palm and coconut oil, giving Southeast Asian participants a strong edge," notes Janarthanan. "This advantage has increased the number of participants and manufacturers of oleochemicals in Southeast Asia, thereby facilitating the overall growth of the fatty acid market in the region."

However, the palm oil industry needs to safeguard against a self-inflicted price war, according to Ratneswary Balasingam, an analyst with Frost and Sullivan. The Indonesian and Malaysian governments have been criticised in the past for flooding global commodity markets with crude palm oil and they have talked about working together to build refining capacity which they could use to better control prices. Additional supplies of palm oil is anticipated mostly as coming from Indonesia, where new plantation are being developed. Malaysia, has also been trying increasing supply but through developing better yields.

"Downstream activities by the cash-rich plantation companies could lead to price wars," said Balasingam. "To survive in these conditions in a mature market, participants need to establish cost-saving practices. Forming partnerships that enable economies of scale to be achieved along with joint ventures with plantation companies are likely to provide market participants with a continued supply of raw materials. This strategy is critical, as even large-scale participants are expected to witness a downward trend in revenues due to intense competition in the market, compounded by growing activity in the biodiesel industry."

Bio-ethanol is also a huge boom area for the palm industry. While palm oil remains a cash crop that binds western food staples such as ice cream, margarine and biscuits, in the past five years the peatlands of Indonesia have been dug up and replanted with palm oil crops. According to the Netherlands Environmental Planning Agency, palm oil production in south-east Asia has increased by 162% since 2002.

The catalyst, in part, is Europe's new-found appetite for biofuels. Further expansion is envisaged by the Indonesian government, who earlier in 2006 announced plans to develop another 3 million hectares in the next decade, mostly to meet the growing international demand for bio-fuel. It is estimated that by 2020, Indonesia will have 11.2 million hectares of oil palm plantations. Further area expansion is agronomically feasible according to the Indonesian Oil Palm Research Institute (IOPRI), which estimated that some 18 million hectares of land are suitable for oil palm plantations.

"It was expected that demand for biodiesel would collapse [because of strong anti-biofuel sentiment in Europe]," said Mistry. "That has not happened. Biodiesel production in 2009 will be somewhat higher than in the previous year."
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Author:Robertson, Will; Rowe, Mark; Nuthall, Keith
Publication:International News
Geographic Code:9INDO
Date:Aug 1, 2009
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