Malaysia palm oil output seen dropping 10% in 2016 on El Nino

[KUALA LUMPUR] Palm oil production in Malaysia will probably drop 10 per cent this year after El Nino cut yields in the first half, according to Plantation Industries and Commodities Minister Mah Siew Keong.

Annual output will be lower even after a recovery in production in the second half, Mr Mah said in an interview in Putrajaya on Thursday. The world's second-largest grower produced 19.96 million metric tons of crude palm oil in 2015, according to Malaysian Palm Oil Board data.

A 10 per cent drop would mean supply of about 17.96 million tons, the lowest since 2010, the data show.

Malaysian inventories slumped to the lowest in more than five years in August as exports surged ahead of festivals in top consumers India and China.

Yields will trail last year's even as production recovers, Franki Anthony Dass, managing director of plantations at Sime Darby, the world's biggest grower of oil palms by acreage, said last month.

While the 2015-16 El Nino has ended, it was the strongest since the record event of 1997-98 and parched palm oil plantations in Malaysia.

"In the first six months the drop was 16 per cent, that's very drastic," Mr Mah said, referring to production.

"The second half will be better than the first half, so I expect an average drop of 10 per cent for the full year."

PRICES

Plantation consultant Ganling Sdn. said last month it expects below-normal production due to El Nino will continue in Indonesia and Malaysia until the first quarter of 2017. While Malaysia's crude palm oil production rose 7.3 per cent in August from a month earlier, it was the weakest for the month since 2012, data show.

Prices will average between RM2,500 (S$826.40) and RM2,600 a ton this year, Mah said. That compares with about RM2,235 average in 2015. The value of Malaysian palm oil and products exports will be "slightly better" than last year's RM63.2 billion as better prices compensate for the decline in production, he said.

Futures on Bursa Malaysia Derivatives entered a bull market in August, on signs of rising demand and speculation a recovery in production after El Nino may be sluggish. Prices are up 2.7 per cent this month after surging 9.1 per cent in August, and closed 1.2 per cent higher at RM2,594 a ton on Thursday.

EXPORT DUTY

Malaysia's B10 biodiesel mandate will be implemented in phases beginning in the fourth quarter, with the starting date to be announced after final consultations with industry stakeholders, Mr Mah said. The majority of the industry has accepted the mandate and tests are being conducted, he said.

The ministry is also planning to review its current crude palm oil export duty structure, Mr Mah said. Malaysia is looking at whether the country should harmonize taxes with Indonesia to prevent undercutting, with joint discussions under way, Mr Mah said.

The two countries together make up around 86 per cent of global supply. Malaysia raised its crude palm oil export tax to 6.5 per cent for October, from 5 per cent in September, according to a Customs Department statement posted on the Malaysian Palm Oil Board website.

Indonesia had zero tax on exports in September.

BLOOMBERG