Palm oil prices hit fresh 2-year top, as Malaysia data spur labour fears


Fears rose over the impact on Malaysia's palm oil industry of a clampdown on foreign workers after data showed output of the vegetable oil falling well below market forecast, driving prices to a fresh two-year high.

Palm oil output in Malaysia, the second-ranked palm producing country after Indonesia, fell 2.2% month on month to 1.67m tonnes in October, which is typically the peak month for volumes, the Malaysian Palm Oil Board said.

While a drop in October volumes is not unprecedented, the extent of the year-on-year decline, at 17.6%, is by far the biggest on data going back to 2011, and reversed what had been a diminishing rate of decline.

The figure was also well below investors' expectations of a 1.73m-tonne production figure, although data from the Malaysian Palm Oil Association industry group had signalled a lower figure was in the offing.

While oil palm yields have been dented by a hangover from drought blamed on the latest El Nino weather pattern, investors earlier in 2016 had forecast the effect wearing off by now.

Legal vs illegal

The continued downturn has raised concerns that a clampdown early in 2016 by Malaysia's government on workers from abroad, amid reports that 3m-6m foreigners could be working in the country illegally, was affecting production.

Besides hiking, for plantations, a levy on foreign workers from 590 ringgit per employee to 1,500 ringgit – still below the rate of 2,500 ringgit charged for sectors such as construction and manufacturing – the move has tightened permits on fresh foreign employees, in an effort to encourage employers to turn to bring illegal workers into the system.

"Many plantations appear to be finding it difficult to find illegal workers and try to legalise them," said respected palm oil industry analyst Ivy Ng, at broker CIMB.

"And when workers work permits expire, [legal workers] have to go back to their origin country," requiring the hiring of replacements.

Output impact?

The continued downturn in Malaysian palm oil output has raised concerns that production is being effected by a labour squeeze more than had been thought, with worries "moreso for smaller plantations than the large operators", Ms Ng told

"However, it is difficult to pinpoint how big a problem this is at the moment, and know whether weakness in production is due to weather and El Nino, or another issue is involved."

"No one can say with certainty how much of a cost there has been in production terms," with some talk of significant impact on output, while other plantations claim little effect.

Two-year price high

The Malaysia Palm Oil Board data also showed Malaysia's exports last month, at 1.43m tonnes, falling by less than investors had expected, although the figure represented nonetheless a 16.4% tumble year on year.

Malaysia's palm oil inventories rose last month but, at 1.57m tonnes, increased by only 1.8% month on month, well below the pace of increase of 8.8%, to 1.68m tonnes, that investors had forecast.

While data for Malaysian palm exports in November showed an accelerated pace of decline – with SGS saying volumes for the first 10 days were down 13.8% month on month, and rival cargo surveyor Intertek putted the rate of fall at 15.7% - palm oil futures extended their rally in Kuala Lumpur.

The February contract stood up 1.8% at 2,895 ringgit a tonne in late deals, earlier touching 2,903 ringgit a tonne, the highest for a benchmark contract since March last year.


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