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'Very tight' stocks to underpin palm oil rally, says Sipef

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The rally in palm oil prices has further to run, plantations group Sipef said, as it revealed that its Indonesian plantations were, after a strong finish to 2015, beginning to show signs of joining the country's output downturn.

Sipef said that it expected a "positive [palm oil] price development… to continue with moderate upside", even after a rally which has already seen values on Kuala Lumpur's futures market revive by some 40% from August's six-year low.

The forecast reflected in part the hangover from dryness, blamed on El Nino, on output in Indonesia and Malaysia, the top palm-producing countries.

"The production of palm oil in Malaysia and Indonesia continued to decline in January and the first half of February," the group said.

Separately on Thursday, a Reuters survey showed market expectations of Indonesian palm oil output dropping for a fifth successive month in January, to 2.44m tonnes, albeit in a seasonally weaker time of year.

Official data last week showed Malaysia's palm output making its worst start to a year since 2011.

'Very tight scenario'

However, Sipef also underlined the growing confidence, on the demand side, in ideas that Indonesia's moves to encourage domestic production and consumptions of biodiesel – made from vegetable oils – is bearing fruit.

"The belief that the Indonesian biodiesel program is living up to its promise has increased, given the actual offtake," the group said.

The result of the dynamics is that "despite moderate exports… stocks have decreased dramatically.

"It is expected that the stocks will drop to a very tight scenario in the second [April-to-June] quarter."

Squeezed stocks imply higher prices, with buyers being forced to pay up to secure supplies, although Sipef flagged limits to the buoyancy in palm oil prices – notably their level compared with values of other vegetable oils, which are to a large extent interchangeable for users.

"The limited discount of palm oil versus soyoil will cap the upside."

'Overhang of stocks'

However, Sipef was less upbeat on prospects for rubber prices, which at 152.50 yen a kilogramme on Tokyo's futures market on Thursday remain amongst their lowest levels since 2009.

While moves by top exporters Thailand, Indonesia and Malaysia to limit shipments "could assist in the near-term… a significant price movement in the coming months is not expected".

"The rubber market will continue to struggle with an overhang of stocks," encouraged by economic slowdown in China, the top importer, and by weak oil prices which enhance the competitiveness of synthetic rubber.

"The negative economic sentiment in China and low petroleum prices will not support an increase in [natural rubber] demand."

'Variable production pattern'

The comments came as Sipef revealed that its Indonesian oil palm plantations were beginning to join in with the country's production slowdown, after showing "vigorous" growth in the October-to-December period, when volumes rose more than 10% year on year.

"Our Indonesian operations showed a somewhat variable production pattern in the first month of the new year, with mature plantations producing larger or smaller volumes than last year, depending on their location," the group said.

Some of its rubber operations, in South Sumatra, had already succumbed to drought effects, with output down 28% year on year during the October-to-December quarter.

Sipef reported a 60% drop to $21.1m in earnings for last year, on revenues cut 21% to $225.9m by lower palm oil and rubber prices.

Shares in the group eased 0.9% to E46.55 in morning deals in Brussels.

By Mike Verdin

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