AFTER sliding some 33% last year, the price of crude palm oil (CPO) shot up in the last three weeks as the floods in the East Coast of Peninsular Malaysia threatened supply. But this could be a short-lived trend as the price of the commodity is influenced by global oil prices, which are still on a steady downward trend, say industry experts and participants.

Brent crude oil prices struck a new low of US$57.33 per barrel last Wednesday, a more than 50% tumble from last year’s high of US$115 per barrel on June 19. CPO prices will also be capped by the weak prices of other edible oils, says an analyst with a local bank-backed research house.

“[The floods in Kelantan, Terengganu, Pahang and Perak] will accelerate the seasonal reduction in inventory and bump up prices. How much is hard to say,” says Alvin Tai, a plantation sector analyst with RHB Research.

He forecasts that CPO prices will average RM2,500 per tonne this year. They have already begun their steady increase, gaining close to 8% in just three weeks to RM2,286 on Dec 29, 2014. The benchmark three-month futures closed at RM2,284 per tonne last Wednesday.

The Malaysian Palm Oil Board (MPOB) expects the nation’s CPO production to fall some 15% to 20% month on month in December, compared with the seasonal 10% decline in most years.

“Production volume could be at 1.4 million tonnes in December,” MPOB director general Datuk Dr Choo Yuen May said at a press briefing last Wednesday.

Malaysia is targeting to produce some 20 million tonnes this year, up from 19.2 million in 2013 and an estimated 19.5 million last year.

As at end-December, the country’s palm oil stockpiles were estimated to fall to two million tonnes, compared with 2.27 million tonnes in the previous month.

A total of 190,600ha of oil palm plantations have been affected by the floods, Minister of Plantation Industries and Commodities Datuk Amar Douglas Uggah Embas told reporters at the same briefing.

He declined to give a price forecast, but said that he did not foresee a shortage in palm oil, simply a reduction in stock levels.

“We believe the expected production shortfall in the industry will be able to provide some short-term support [to CPO prices],” TH Plantations Bhd CEO Datuk Zainal Anwar tells The Edge.

But he says this impact should be minimal given that the worst-hit states, Kelantan and Terengganu, collectively contribute only 5% to Malaysia’s CPO production. Pahang and Perak contribute 15% and 10% respectively, according to 2013 data.

“Due to the flooding and supply disruptions, we expect a short-term rise in CPO prices. However, we do not expect CPO prices to rise greatly in the long term due to the continued low crude oil prices and therefore weakened demand for discretionary blending of biodiesel,” Kim Loong Resources Bhd managing director Gooi Seong Heen tells The Edge.

“It is getting clearer every day that CPO is becoming very uncompetitive as a source of biofuel,” says James Fry, chairman of agribusiness consultancy LMC International Ltd, referring to the gap between CPO and crude oil prices. A tonne of CPO now costs RM700 more than a tonne of crude oil, making crude a more attractive fuel source than biofuel blends, he says.

“In my view, this will limit any further rises in the CPO price, since the market is already discounting the usual fall in stocks until the second quarter of 2015,” he tells The Edge.

In an effort to shore up falling CPO prices as the country’s palm oil inventory crossed the two million tonne mark in September, Malaysia raised its biodiesel mandate for the B7 blend — a blend of 7% palm oil and 93% diesel fuel — from 5% to 7%.

The B7 rollout is expected to use 700,000 tonnes of palm oil per annum, according to estimates from the Ministry of Plantation Industries and Commodities.

Events have taken an interesting turn now that unusually heavy rainfall has prevented harvesting activities in some estates in the Eastern states.

But experts say there will not be a substantial loss to output if the heavy rains do not continue for much longer.

“If the heavy rains last much longer than usual, that is La Niña weather (the opposite of the drought conditions associated with El Niño), but right now, no one is talking about the arrival of La Niña,” says Fry.

The Malaysian Meteorological Department expects the monsoon to continue until mid-January, according to news reports.

Extent of damage on the ground still uncertain

Some 7,500 smallholders and another 230 oil palm estates have been affected by the floods, according to the Ministry of Plantation Industries and Commodities, but no one knows for sure the extent of the damage until the water recedes.

The issue at hand is that floodwaters have disrupted the harvesting and collection of fresh fruit bunches (FFB), which could have an impact along the supply chain.

But there has been no reported disruption in the processing of palm oil, according to the Palm Oil Refiners Association of Malaysia (Poram).

“Milling and refinery machines are not easily damaged by floodwaters. If affected, they only need some cleaning. The issue here is the harvesting of FFB and transporting them to the mill,” Poram CEO Mohammad Jaaffar Ahmad tells The Edge.

“We have around one million tonnes of CPO in stock now … refining will not be affected as we can still process them at least for another one month without any new supply of CPO,” he adds.

But the flood condition and its aftermath could hinder transport along the supply chain. For instance, Kim Loong Resources Bhd, which operates in East Malaysia and Johor, has seen a 30% drop in FFB supply to its mill in Kota Tinggi, Johor, for December, according to managing director Gooi Seong Heen.

Similarly, TH Plantations Bhd (THP), which has estates in Johor, Pahang and Terengganu, has halted its FFB production. Checks with the company indicate that only its plantations in Terengganu have so far been affected by the monsoon rains.

“Save for one of our estates, most of our estates in Terengganu have not, thankfully, reported any extraordinary flood hits — the floods that they are currently experiencing in those areas are similar to what they experienced in 2013 and the years before,” THP CEO Datuk Zainal Anwar says.

The said estate is some 2,500ha, of which 700ha are mature palms. “From a total portfolio perspective, this particular estate in Terengganu makes up less than 2% of our total mature areas,” says Zainal.

While oil palms are generally hardy plants, able to withstand some waterlogging, newly planted immature trees may not be able to survive prolonged submersion.

THP is optimistic about the survivability of its palms as long as they are not completely submerged for more than a week. “Having said that, we do expect some casualties, as is the norm in flood-prone areas, but these will be transplanted with new palms as soon as conditions permit,” Zainal says.

Also operating in Terengganu, TDM Bhd has some 4,000ha affected by the floods where about 12% of its area is under water, according to its plantation business’ chief executive, Abdul Halim Yusof.

“The affected area has mostly mature palms above 15 years of age and they can survive up to three weeks under water,” he tells The Edge in a text message. He adds that the area has been flooded for just over a week and the water seems to be receding at the time of writing.

For United Plantations Bhd (UP), which has estates in Perak, some 2,000ha to 3,000ha are flooded.

“There is probably 1,500ha where harvesting has not taken place for 30 days now. We may lose on average 4,000 to 5,000 tonnes of FFB from November onwards,” UP executive director Datuk Carl Bek-Nielsen tells The Edge in an email reply.

This article first appeared in The Edge Malaysia Weekly, on January 5 - 11, 2015.

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