Palm oil demand weakness set to outweigh June’s likely output decline

16.06.2017

Palm oil prices could come under further pressure in June as weakening export demand outweighs an expected drop in production during the Ramadan and the Eid-Al-Fitr holiday period.

Benchmark prices for palm oil, used to make everything from cooking oil and soap to cosmetics, have already shed about 20 percent so far this year on an expected rise in output after a drought-affected crop last year.

Production in Indonesia, the world’s top palm oil producer, is seen falling 5-8 percent in June versus the previous month, said Derom Bangun, chairman at the Indonesia Palm Oil Board.

Indonesia and Malaysia, which produce nearly 90 percent of global palm oil, are Muslim majority countries that observe Ramadan and Eid, which fall in June this year, leading to a shortage of workers to harvest fruit.

Bangun said some plantation managers try to harvest all their fruit before the holiday, but young fruit leads to lower yields, while overripe fruit harvested later can suffer quality issues due to a higher fatty acid content.

Malaysian planters are already concerned that a labour shortage will affect future output, as many workers from neighbouring Indonesia are staying away due to a weaker ringgit and more opportunities at home.

“We can foresee a shortage of workers, especially harvesters, when crop production starts to pick up in June and July,” said Zakaria Arshad, chief executive of Malaysia’s Felda Global Ventures Bhd.

“While it is not peak season yet … June will definitely be less productive and the quantity of oil in the market will be reduced in June and throughout Eid.”

However, traders said a slowdown in exports is set to outpace any drop in output. Three traders told Reuters they expect a 10 percent to 15 percent drop in Malaysia’s June shipments, due to a fall in demand post-Ramadan and as buyers shift to more competitive edible oils such as soy.

Ramadan sees Muslims break day-long fasts with communal feasting, incurring higher palm oil usage for cooking purposes, while Eid marks the end of the fasting season.

“June exports are shaping up very badly… There is no one buying as we approach the second half of the year. Key destinations are seeing a big negative,” said a palm oil trader based in Singapore.

Palm oil demand from China, the world’s second biggest importer of the tropical oil, is seen falling in the coming months as the country switches to rapeseed oil from national stockpiles and soyoil from rising soybean crushing volumes.

India, the world’s largest importer of vegetable oils, is also facing an oversupplied oilseeds market, which could limit imports of palm oil.


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