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'Upside potential' for palm oil prices, despite output revival signs

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Sipef flagged "upside potential" for palm oil prices, even as the plantations group said that production in parts of Indonesia appears to be recovering faster than the modest revival highlighted in Malaysia.

The group said that the "big question" for palm oil investors was how strongly output was recovering in major South East Asian producing countries from the downturns blamed on a hangover from drought caused by last year's El Nino.

In Malaysia, the second-ranked palm oil producing country, the revival "seems to be a mild one… so far", Sipef said.

The comments follow official data showing a 12.5% year-on-year drop in output for September, and with investors expecting statistics for October – usually, the peak production month - to come in weak too.

However, in Indonesia - the top producing country, but where supply and demand data are less freely available – "there are regions… where very strong recoveries are happening".

'Upside potential'

The comments follow a survey by Reuters showing that investors believe Indonesian output rose by 2.4% last month, from September, to 2.9m tonnes, although a figure below the 3.01m tonnes estimate for October last year.

And Sipef said that its own Indonesian plantations, in North Sumatra, appeared to be recovering after a July-to-September period in which volumes fell "markedly short of those for the same period last year", with a drop of 11.5%.

"The protracted effects of El Niño appear to have worn off, and fruit bunches are being formed," the group said.

"We do expect palm oil volumes to increase during the remaining period of the year."

'Upside potential'

Nonetheless, with the industry's production revival coming at a time of seasonal decline in output, and when inventories are already weak, Sipef downplayed the threat to prices for now.

"Stocks will be much lower going into 2017 than a year ago," it said.

"Palm oil is relatively cheap compared to liquid oils and once the peak production is behind us, we expect a steady market with upside potential."

Kuala Lumpur palm oil futures on Tuesday hit 2,800 ringgit a tonne, their highest in more than two years, although the benchmark January contract has since retreated to stand at 2,718 ringgit a tonne in late deals on Thursday.

Rubber, tea price prospects

Sipef added that it expected a "steady market for rubber in the coming months", albeit with potential for some gains if demand proves greater than expected.

"Despite the slow progress of the Thai rubber production, the supply and demand sides seem to be balanced."

For tea, the group forecast prices remaining "at current levels, to slightly higher", supported by production setbacks in the key Kenyan market.

"With the late start of the 'short rains' and expected depressed rainfall during the fourth quarter Kenya's tea production is expected to be below last year's level."

By Mike Verdin

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