x Abu Dhabi, UAETuesday 25 July 2017

Rise in output sends price of palm oil sliding

Though demand for palm oil is strong, analysts say its abundance has affected prices.

Palm oil may be suffering from indigestion. Spot prices for the commodity, one of the world's most widely used edible oils, have slipped in recent months as output climbs.

Production has been rising steadily after adverse weather last year depressed output.

Intermittent floods in the world's biggest producers of the cooking oil - Malaysia and Indonesia - submerged oil-palm estates and closed roads, slowing production and deliveries.

Though demand for the commodity is strong, analysts say its abundance has affected prices.

Abah Ofon, a commodities analyst at Standard Chartered, said palm-oil prices have not only "trended down due to higher output [but also because of] lower taxes from the Indonesian government".

Indonesia, the largest producer of the commodity, has said it will cut its export tax on crude palm oil this month to 17.5 per cent from 22.5 per cent as international prices continue to fall. This is likely to mean more palm oil will be exported, analysts say.

Mr Ofon last month lowered his forecast for crude palm oil to an annual average of 3,679 Malaysian ringgit per tonne from a prior forecast of 4,010.

"We remain bullish [on] crude palm oil but expect gains to be limited by improving output," he said.

With palm-oil futures now trading at about 3,300 Malaysian ringgit per tonne, from highs of 3,900 in February, demand for energy alternatives has also prompted increased production of palm oil.

Prices for crude oil, currently at two and a half year highs, have increased the appeal of vegetable oil as a cheaper fuel.

But analysts say long-term demand is likely to rise, driven mainly by the increasing use of edible oils in India and China, where prosperity is triggering dietary changes that are slowly raising demand for processed foods. Many of these, such as pastries, chocolate and ice cream, contain palm oil.