Profits ahead for Southeast Asian palm oil firms as El Nino hits inventories

[KUALA LUMPUR] Palm oil inventories are set to drop further as an El Nino weather event chips away at yields in Southeast Asia, boosting a rally in prices of the tropical oil and helping producers rake in more profits for the first time since 2011.

Palm oil prices have risen almost 9 per cent over two months, with analysts expecting this trend to sustain this year as the El Nino cuts global output by 2-3 million tonnes, exports pick up and top producers Indonesia and Malaysia mop up more of the tropical oil locally to meet higher 2016 biodiesel mandates. Malaysian inventories have already hit an eight-month low of 2.17 million tonnes in February and, according to MIDF Research, they could slump to 1.5 million tonnes later this year - the lowest since early 2011.

Brokerage UOB Kay Hian says there is a high possibility of the world's biggest buyers, India and China, replenishing their palm oil supplies after low imports in February, tightening stockpiles further. Demand is also likely to get a boost before the Muslim holy month of Ramadan, which begins in June this year and when consumption of edible oils rises. Malaysian exports have already picked up 10.5 per cent month-on-month in the first half of March, a cargo surveyor data shows.

This combination of factors could not have come at a more opportune time for Southeast Asian palm oil producing firms, which have been struggling with declining cumulative profits for the past four years with palm oil prices down around 22 per cent. Twelve of the biggest such companies, including IOI Corp and Golden Agri-Resources Ltd, are expected to report combined profit growth of 20 per cent in 2016, according to Thomson Reuters StarMine Mean Estimates.

The challenge for them will lie in their ability to control costs linked to lower output and a 5 per cent tax on April crude palm oil exports from Malaysia after 11 months of duty-free sales. "It is possible that profits will improve as a result of higher prices but we have to bear in mind that profits will be held down by increasing costs," said Roy Lim, group plantations director of palm oil firm Kuala Lumpur Kepong Bhd.

REUTERS