Palm Reserves in Indonesia Seen at 19-Month Low; Prices Rise

Palm oil inventories in Indonesia, the biggest supplier, probably decreased in January to the lowest since June 2012 as production fell for a second month. Futures advanced to the highest since Dec. 9.

Reserves shrank to 1.86 million metric tons from 2 million tons in December, according to the median of estimates from five plantation executives, traders and industry officials compiled by Bloomberg. Output fell 4.8 percent to 2 million tons, the lowest level since May, the median of four responses showed.

Declining supplies of the commodity used in everything from Nestle SA instant noodles to Unilever soaps may extend a bull market in futures in Kuala Lumpur, after production in Indonesia fell last year for the first time since 1998. That would curb a decline in global food costs as measured by the United Nations. Biodiesel mandates in Indonesia and in Malaysia, the second-biggest palm oil producer, should boost domestic consumption, according to HSBC Holdings Plc.

“Supply growth may be limited,” said William Simadiputra, an analyst at PT Indo Premier Securities in Jakarta. “Output is slowing on seasonal factors and will remain weak until the end of the first half.”

Production is typically lowest in January and February because of growing cycles and the annual rainy season. The harvest fell 1.9 percent to 26 million tons in 2013 from a year earlier, according to the Indonesian Palm Oil Association, or Gapki. The country increased output fivefold since the last drop in 1998, U.S. Department of Agriculture data show.

Bull Market

Futures entered a bull market in November and rallied 26 percent to 2,688 ringgit ($810) a ton on the Bursa Malaysia Derivatives today from a three-year low of 2,137 ringgit on July 26. While Gapki doesn’t publish inventory and output data, it may release January export figures next week. The changes in production and inventories are derived from earlier surveys.

Exports fell to 2 million tons last month from 2.02 million tons in December, the median of five estimates showed. An increased oilseed harvest in India curbed imports by the largest buyer, said Sahat Sinaga, executive director at the Indonesian Vegetable Oil Industry Association.

Output was “relatively low in January because of seasonal factors, which was normal and expected,” Sinaga said. Reserves are set to recover to 2.2 million tons in February as shipments decrease, he said. Exports drop during the Northern Hemisphere winter as the tropical oil clouds in cooler temperatures.

Biodiesel Demand

Production will rise to as much as 28 million tons this year, according to Gapki. Dorab Mistry, director at Godrej International Ltd. who has traded palm oil for more than three decades, estimates output will rebound to 30.5 million tons. In the first quarter, less supply and increasing use in biodiesel will probably keep prices between 2,600 ringgit and 2,900 ringgit, he said on Nov. 29.

Prices will average $900 a ton this year and $1,000 in 2015 on reduced supply growth, recovery in demand from India and China, and higher domestic biodiesel production, said Simadiputra of Indo Premier Securities. China is the biggest buyer of palm oil after India. Standard Chartered Plc forecasts futures to average 2,575 ringgit this year, Abah Ofon, the bank’s Singapore-based analyst said in a report dated yesterday.

“Ambitious biodiesel mandates in Indonesia and Malaysia should keep more palm oil at home,” Thilan Wickramasinghe, an analyst at HSBC in Singapore, said on Jan 28. “In Indonesia, palm oil exports as a percentage of production have already fallen to 71 percent in 2013, from a peak of 78 percent.”

Domestic consumption may increase to 10 million tons this year from 8 million tons in 2013 if biodiesel use climbs significantly, Gapki’s Secretary General Joko Supriyono said Jan. 15. The country in September raised biodiesel blending in diesel fuel to 10 percent from 7.5 percent and for power plants the requirement was raised to 20 percent last month.

World food costs fell in January to a 19-month low and are down 15 percent from a record in February 2011, according to the Food & Agriculture Organization. The FAO’s gauge of 11 oils and fats dropped 34 percent over the same period.

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