[KUALA LUMPUR] Severe monsoon flooding in Malaysia that has forced more than a hundred thousand people to evacuate, is likely to cause a bigger-than-expected disruption to crude palm oil production in the world's No 2 producer, planters and traders said.
This will give legs to the recovery in benchmark Malaysian palm oil prices, which plunged to their five-year lows of RM1,914 (US$549) three months ago on fears of overwhelming supplies of rival oilseeds, and took another beating in early December from a slide in crude oil prices.
Floods in key palm-growing areas would hinder harvesting, transportation and crushing of fresh palm fruits, leading to tighter supplies of the world's most traded vegetable oil in December and early 2015.
"This year the floods are quite bad. It's worse than normal. A lot of the east coast estates are not functional now - they are under water," said Roy Lim Kiam Chye, group plantations director at Malaysia's Kuala Lumpur Kepong. "The question is the supply that will be affected. Even when harvesting resumes, there will be a lot of quality problems."
Thunderstorms prevent plantation workers from harvesting fresh fruit bunches from oil palm trees, leaving them to overripe and in some cases rot.
Fruits that do get harvested, however, may not make it to mills in time to be crushed as roads are inundated with water, or may have to be turned away as mills are shut due to flooding.
The delay in crushing and exposure to excess water drive up the free fatty acid (FFA) content in crude palm oil, reducing its quality. "If you got a 7 per cent free fatty acid (content), which is 2 per cent above the maximum permitable tradeable level, then you're going to have higher losses and problems to run the bad quality oil through the machinery," said a second Malaysian-based planter, who declined to be named.
"Output will drop 5 per cent more than it would have been for December," the planter added, and estimates production could now drop 18 per cent from November to around 1.43 million tonnes.
The number of people evacuated from their homes rose sharply to nearly 119,000 as 0700 GMT on Friday from 35,000 on Tuesday, state news agency Bernama reported, in what local authorities say is the nation's worst flooding in decades.
The worst-hit states are Kelantan, Terengganu, Pahang and Perak, which together account for about 30 per cent of Malaysia's palm supply.
A group of millers in southern Peninsular Malaysia earlier this week estimated that output across Pahang, Johor and Malacca tumbled 36 per cent between Dec. 1 and 20 from a month earlier, traders said, as heavy rains take its toll on palm's seasonally weaker cycle.
Malaysia's meteorological department expects more monsoon rains until the end of the year, its website showed.
Palm prices, which closed at RM2,249 on Friday and posted their biggest weekly gain in two months, would be underpinned by concerns about the steep drop in output and investors refraining from any sell-off, traders said. "If you're a palm oil player and you see parts of the country under water, you're not going to take the risk," said the second Kuala Lumpur-based trader, who sees prices finding a new support at RM2,200.
However, four planters and traders contacted by Reuters expect any rally in the near term to be capped at RM2,300 as worries of weak crude prices and record supplies of soybeans linger.