KUALA LUMPUR, Jan 19, 2016:

Growth in world palm oil output is expected to slow this year due to unfavourable crop weather and an overall decline in yields, a leading industry analyst said today.

A smaller rise in production could propel further gains in benchmark palm oil futures that are currently near a three-week top of RM2,495 per tonne.

Palm oil output in Malaysia, the world’s No 2 producer of the tropical oil, is expected to drop marginally to 19.8 million tonnes in 2016, while top producer Indonesia will see output rising slightly to 34 million tonnes, said Thomas Mielke, editor of Hamburg-based newsletter Oil World.

In 2015, Malaysia produced 19.96 million tonnes of palm oil. Indonesian Palm Oil Association (GAPKI) estimated Indonesia’s output at 32.5 million tonnes for the year.

“Palm oil has lost momentum, production saw a relatively slow growth last year and will see a further slowing down in 2016,” Mielke said.

“This is not only due to weather factors … actually yields per tree are declining, which is quite alarming.”

Mielke expects a moderate rise of 0.6 million tonnes in world palm oil output in the current season.

“This is shocking,” he said, as it is below an annual average increase of 2.7 million tonnes. Mielke was speaking at a palm oil economic review and seminar in Kuala Lumpur.

Malaysian and Indonesian palm oil export prices, free on board, have the potential to appreciate by about US$50-100 from current levels by June if any additional production problems occur, he added.

“It is a tentative estimate, we may still be overestimating Malaysian and Indonesian production. A scenario is possible where world production of palm oil will only stagnate or be in decline slightly in calendar year 2016.”

Mielke also said Indonesia’s biodiesel production in 2016 would reach around 2.5 million-2.6 million tonnes, up about one million tonnes from last year.

Malaysia’s biodiesel production would decline to 0.7 million tonnes this year from 0.8 million tonnes in 2015, he said.

Indonesia raised its minimum bio content in diesel fuel to 15% last year to cut its oil import bill and mop up its supplies of crude palm oil. The mandate will be raised to 20% this year, and to 30% in 2020.

Malaysia’s mandate is currently at 7%, although it has been proposed that this be raised to 10%.

Palm oil prices are likely to get a boost from the higher production of palm oil-based biodiesel, especially in Indonesia, industry officials at the seminar said.

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