Heavy rains in Peninsular Malaysia drive palm oil supply concerns

Crude palm oil futures rose as high as 4% on the Malaysian commodities exchange on Jan. 3, driven by concerns that heavy rains across seven states in Malaysia may slow palm oil production at the world’s second largest producer.

March CPO futures on the Bursa Malaysia Derivatives exchange closed 3.34% higher at MR 4,854/mt ($1,160.97) on Jan 3, and opened stronger Jan. 4, after a Malaysian trade body estimated weaker production for December.

The Southern Peninsular Palm Oil Millers Association said it expected an 8.5% month-on-month dip in output from the Peninsular Malaysian region in December.

“Looks like East Malaysia will witness lower output and I am hearing that certain estates in Pahang and Johor are badly affected,” David Ng, senior trader at IcebergX Sdn Bhd said.

Malaysia’s Peninsular states usually account for more than half of the country’s total palm oil production, with the rest coming from the Sabah and Sarawak regions, according to data from the Malaysian Palm Oil Board.

Trade sources observed that production activities such as milling and transportation in the states of Selangor and Pahang have been the worst affected, while harvesting work has stopped in parts of Johor, along with logistics issues due to road closures across the states.

Since Dec. 15, the cost for local delivery of crude palm oil in Malaysia has risen by 8% to MR 5,232.5/mt ($1,251.50) on Jan 3, 2021, the MPOB data showed.

Last month, Malaysia’s national disaster management agency declared flood events in Central and West Malaysian states such as Selangor, Melaka, Johor, Terengganu, and Pahang — major oil palm growing states in Peninsular Malaysia.

In physical markets, supplies are not arriving in full due to the persistent weather disruption, but the situation should improve this month, Sandeep Singh, director of Kuala Lumpur-based palm oil trading firm, The Farm Trade, said.

Market analysts also said the impact of the floods on production will be limited, when considered in a historical context.

SPPOMA’s low production warning is better than the market view, which expects Malaysia’s December palm oil output to fall by 10%-13% from its November output of 1.64 million mt, Marcello Cultrera, sales manager and derivatives dealer at Kuala Lumpur-based Phillip Futures said.

“Last year’s December production was 1.33 million mt. This year, the expectation is at 1.5 million mt; a big difference,” Cultrera said, adding that overall precipitation levels at Malindo, or Malaysia and Indonesia, were similar to previous years, even in December.

The MPOB will release official data on December supply and demand on Jan. 10.

The floods could be responsible for a 3% reduction to January’s output, considering a 1-2 day loss of production in affected regions, Aditya Jeripotula, head of research at commodities and risk firm TransGraph Consulting said.

It is estimated that the wet weather will persist until at least mid-January. It will be interesting to see how production shapes up once the weather turns hot, because it is not like palm oil fruits are not available, only harvesting has been delayed, Mario Johan Nurtanio, a trader who works with Johor-based feed fats-maker Wawasan Agrolipids told Platts.

S&P Global Platts

Tags: futures, weather, Crude palm oil, markets, Production, Malaysia