Palm oil futures rise on Malaysia stocks downgrade

Palm oil futures rose back above 2,600 ringgit a tonne as the Malaysian Palm Oil Board trimmed expectations for Malaysia's inventories, chiming with broader upbeat comment on prices of the vegetable oil.

Palm oil futures for April, the benchmark contract, closed up 1.1% at 2,603 ringgit a tonne in Kuala Lumpur, extending to 4.4% a revival in prices from a two-month low set last week.

The recovery reflected an estimate from Choo Yuen May, the Malaysian Palm Oil Board's director-general, that inventories in the world's second-ranked producing, and exporting, country would end the year at 1.6m-1.8m tonnes.

The board, Malaysia's palm industry regulator, had previously estimated end-2014 stocks at 1.76m tonnes, in itself a reduction from the 1.99m tonnes at which they ended last year.

'Exports to improve'

Dr Choo attributed the estimate to demand spurred by prices which remain low by the standards of 2012 and 2011, when futures hit 3,967 ringgit a tonne, and in particular from the biofuels industry.

"Exports are expected to be better as crude palm oil price stabilises and higher demand comes in from the biodiesel industry," she said.

Malaysia intends to lift to 7%, from 5%, the mix of palm oil-based fuel in domestic diesel.

Indonesia, the top palm producing country, is raising to 10% the mandated blend of biodiesel in forecourt fuel, with power utilities obliged to use a 20% mix.

'Price may well recover'

The comments chimed with those released separately by REA Holdings, the London-listed palm oil group which is listed in Indonesia.

While Rotterdam palm oil prices had fallen by more than $50 a tonne so far this year to some $850 a tonne, in part a reflection of a stronger dollar against the ringgit, "with increases in the government mandated biodiesel component of transport fuel in Indonesia, Malaysia and Argentina, it may reasonably be expected that any further [price] decline will be limited.

"Indeed, the price may well recover, although much will depend on the level of 2014 soybean crops."

Soybeans are the source of soyoil, a major rival to palm oil on vegetable oil markets, and indeed the primary feedstock for biodiesel in the Americas.

'Increasing demand'

In London, broker VSA Capital forecast "palm oil price strength… at least into the early months of this year", boosted by buoyant demand prospects at a time when production in Indonesia and Malaysia is in seasonal decline.

"Malaysian stocks are likely to remain below the psychological 2.0m-tonne mark," VSA analyst Edward Hugo said.

"As we progress through the rainy season, any stockpile increase is likely to be muted."

Besides from biodiesel, palm oil demand stands to be boosted by anti-dumping duties imposed on biodiesel from Argentina and Indonesia, "increasing demand for feedstocks, including palm oil".

In the US, the withdrawal by food safety officials of the "generally recognised as safe" classification from partially hydrogenated oils, or so-called trans fats, "could boost demand for palm oil, at the expense of competitors such as soyoil", Mr Hugo said.

'Bullish case wins out'

While the prospect of strong world soybean production did represent a negative for prices, "balance, we feel that the bullish case wins out and that the palm oil price strength will continue, at least into the early months of this year", he said.

"We think CIF Rotterdam crude palm oil will initially push through $950 a tonne, before paring back in the second half, but remaining above $900 a tonne, to produce an average for the year of approximately $950 a tonne."

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