Southeast-Asia palm oil sector facing double blow

JAKARTA: South-East Asia’s booming palm oil industry is facing a double blow from a recent drought and a possible El Nino weather phenomenon later this year, with analysts warning a production shortfall could spark a jump in consumer goods prices.

From biscuits to shampoo and make-up, the oil has become a key ingredient in numerous products found on supermarket shelves across the globe, fuelling rapid growth of the industry in the world’s top two producers, Indonesia and Malaysia.

But a drought in January and February in the countries, which provide some 85% of the world’s palm oil and are home to vast plantations where swathes of rainforest used to stand, has raised the prospect of a drop in production later this year.

Dry weather does not have an immediate effect on the fruit, which needs to be deprived of water for some months before any impact is noticeable.

While palm oil prices have risen slightly in recent months in Indonesia, the country’s Palm Oil Association put it down to other factors, and industry observers predicted the drought’s impact would start to be felt later in 2014.

“We are likely to see the effects starting in September to October, and in terms of production, we are likely to see a double-digit percentage drop in Indonesia and Malaysia,” said Tan Chee Tat, a Singapore-based investment analyst at Philip Futures whose work has focused on palm oil. “There is a high likelihood companies will pass on the price rise to consumers.”

Another threat could come hot on the heels of this year’s dry weather – forecasters are predicting an El Nino weather phenomenon later this year, which could spark another drought that will hit production in 2015.

If this year’s El Nino is as strong as the 20th century’s worst in 1997-98, which was blamed for tens of thousands of deaths and billions of dollars in damage, it could wreak havoc on palm oil crops, analysts fear.

Alan Lim, a palm oil plantation analyst from Kenanga Investment Bank in Malaysia, said that “in the worst case scenario” an El Nino could cause a 30% dip in production in the top two producers. — AFP