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Global 2016 palm oil output to grow less than expected on El Nino, haze: analyst
[KUALA LUMPUR] Global palm oil output will grow by a million tonnes less than expected in 2016 due to a crop damaging El Nino weather event and haze from Indonesia's slash-and-burn agricultural practices, leading vegetable oils analyst Dorab Mistry said.
Any dent to production in Indonesia and Malaysia, which account for 85 per cent of the world's palm oil output, will buoy prices of the tropical oil that have recovered 25 per cent from a 6-1/2 year low of 1,863 ringgit (S$606) per tonne plumbed in August.
"The current El Nino is still unfinished business. If dry weather returns to Indonesia and parts of Malaysia ... say around January 2016, then it will be a serious development and that can further reduce output in 2016," Mistry said at the China International Oils & Oilseeds Conference on Thursday.
"In that event, we shall be looking at a net decline in 2016 palm oil production. However, if the drought is now over, we shall see a net increase," Mistry added.
He expects global output to rise 1.5 million tonnes in 2016, versus a prior forecast of 2.5 million tonnes.
Mistry sees palm prices at 2,100-2,400 ringgit per tonne and expects them to trade at the upper end of this range on a weak currency. The ringgit, currently at around 4.36 versus the dollar, has plunged 24 per cent this year. A weaker ringgit makes palm cheaper for holders of other currencies.
Palm could climb to 2,500 ringgit if the currency weakens to 4.50, but this level will not be sustainable unless backed by higher crude oil prices, which make palm an attractive option for blending into biodiesel, Mistry said.
Last Thursday, palm prices hit a two-week top after Indonesia named the companies that had won quotas to supply biodiesel to state-owned energy firm Pertamina, spurring hopes that this would mop up more of the country's palm oil and leave less available for exports.
But Mistry sees a limited impact.
"If they all produce and deliver the tonnages allocated and Pertamina takes delivery and blends and pays for those tonnages as agreed, the Indonesian biodiesel programme can be said to have finally started in earnest," Mistry said.
"However, neither Pertamina nor the Indonesian biodiesel producers have a good record of performing as announced." Also, the support this new demand lends to palm will be limited unless gas oil prices rise, he added.
Soya oil too is a threat for palm, he said.
The spread between refined-bleached-deodorized palm olein and crude degummed soya oil has dropped to around $20 in May-June-July 2016, said Mistry. "This does not augur well for palm oil demand from price sensitive markets like India."