Palm oil output in Malaysia, one of the two big producers,
fell faster than expected last month thanks to a double whammy of flooding and
seasonal decline – but an even quicker drop in exports dampened investor sentiment.
Palm oil production in Malaysia fell 5.6%, month on month, to
1.86m tonnes in November, a far bigger drop than expected by investors, who had
forecast a figure of 1.95m tonnes.
While output typically starts a seasonal decline at this
time of year, as monsoon rains hamper harvesting and lower oil extraction rates
from palm fruit, the drop this time was exacerbated by excessive rainfall,
which has continued into this month.
"Flooding is more frequently being reported as impacting production,
so we would expect a further drop in December," Edward Hugo, agriculture
analyst at London broker VSA Capital said.
However, the data showing Malaysia's exports dropping even
quicker than production, by 8.7% to 1.52m tonnes, some 70,000 tonnes fewer than
investors had expected.
And separate data from cargo surveyors showed the decline
extending into this month, with Intertek pegging the decline in the first 10
days of December at 19.8%, compared with the same period of November.
Societe Generale de Surveillance put the drop at 26.1%, flagging
particularly steep declines in shipments to Europe, down 55% to 59,803 tonnes
and India, down 60% at 31,315 tonnes.
Palm oil exports to many northern hemisphere countries falls
at this time of year, with palm oil's relatively high solidification temperature
making it unsuitable for use in making biodiesel for use in the winter.
Furthermore, "the eradication of the previously large palm
oil/soyoil discount will also likely subdue demand", Mr Hugo noted.
The data, coupled with a lower-than-expected import
forecast, meant that Malaysian stocks grew to an eight-month high of 1.98m
tonnes at the end of last month, albeit a figure in line with market
Nonetheless, stocks are more than 20% lower than a year,
limiting the dent to palm oil futures, which closed down 0.2% at 2,639 ringgit
a tonne in Kuala Lumpur nonetheless, for the benchmark February contract.
Mr Hugo said that with export demand "subdued", Malaysia's
palm oil stocks" are likely to stay around these levels in December before
falling in the first few months of next year as we enter the much lower
However, he also highlighted the growing influence of domestic
Malaysian consumption, which the government is attempting to increase through
measures such as increasing next the year the amount of palm-based biofuel to
be blended into diesel.
"Domestic demand is now running at +13.4% year on year to
date, suggesting that efforts to increase in-country demand are having an
effect,"Mr Hugo told Agrimoney.com.
"The incoming increase to the Malaysian blending mandate
will increase domestic consumption further."