Issue 1 - American Palm Oil Council

Market AnalysisThese are happy days for the palm oil sectorThe Bulls have been extremely delighted to see theprice of crude palm oil (CPO) soaring to new highs,and even hitting a fresh record of RM3,280 on Jan 11.The entire edible oil market is experiencing a paradigm shift assubstantial demand is now coming from three sectors – food, nonfoodand energy. The correlation has never been stronger in theprice movement between edible oils and fuel oils. Demand andsupply fundamentals are no longer the core determinant of price.The price has been able to hover above the RM3,000/tonne levelwithout any sign of struggle thus far. Nymex crude oil rose aboveUS$100/barrel briefly on Jan 3, just days after the assassination offormer Pakistan premier Benazir Bhutto on Dec 27 last year.Despite some scepticism about sustainability, some oil expertsclaim that the current crude oil price is still below the 1980record after adjustment for inflation.Goldman Sachs has raised its crude oil average price target toUS$95/barrel for the year. The most influential player in thecommodities market also pegged the year’s US soybean pricetarget at US$14.50/bushel, a big revision from US$9 earlier. Cananyone not take heed of that?Malaysia's CPO production last year turned out better thanexpected at 15.82 million tonnes, as crop performance pickedup tremendously during the last quarter. The average tradedprice was RM2,516.50, up 67.5% from the previous year.The fundamental outlook for palm oil remains friendly in theimmediate term. The global supply and demand situation forvegetable oils will continue to be tight and stocks are expectedto dip further. According to Oil World, stocks of major oils andfats may fall to 9.6% of annual usage by the end of the year, thelowest in more than 20 years.World CPO production is expected to surge by 3.9 milliontonnes this year, according to Oil World, amidst yield recovery andmaturing of crops. Malaysia and Indonesia are expected tocontribute 16.8 million and 18.8 million tonnes respectively.Thiswill not have much of a negative influence on price, as theincrease will be fully offset by a shortfall in other vegetable oils.A Free Trade Agreement signed between Malaysia and Pakistantakes effect from January. This allows Malaysian palm oil to beimported at a duty discount of 10% which can be translated toa US$15/tonne price advantage against Indonesian production.This may well shift some demand from Indonesia to Malaysia.China has been replenishing its reserves of edible oils and oilseeds,which had been released to counter rising food prices.This is being40GLOBAL OILS & FATS BUSINESS MAGAZINE • VOL.5 ISSUE 1, 2008