Palm oil rally on El Nino bucks resource rout

KUALA LUMPUR: September was a rough month for commodities as China’s slowdown and excess supplies spurred losses in oil and industrial metal prices.

Palm oil is a reminder that there’s still opportunities for commodity bulls with a 19% advance.

The world’s most-used edible oil capped the biggest advance since 2009 last month, surging into a bull market after entering a bear market just a month earlier, as the strongest El Nino in almost two decades threatens to parch crops in Southeast Asia.

A slump in the Malaysian ringgit, this year's worst-performing Asian currency, aided the rally, which came after palm oil fell to a six-year low in August. Commodities extended losses for a third month, lingering near the lowest since 1999, as oil resumed a decline.

“Global weather concerns continue to persist,” said Kunal Shah, head of commodities at Nirmal Bang Securities Pvt Ltd, a brokerage in Mumbai. “There will definitely be a negative impact on production in Malaysia and Indonesia. We are also envisaging strong demand.”

El Nino may curb yields in Indonesia and Malaysia, which account for 86 % of supply, with global output seen at below-average growth in 2016, Oil World said this week. The weather pattern in the Pacific Ocean is set to peak toward the end of this year and last into early 2016, according to Australia's Bureau of Meteorology. It is the strongest since the record 1997-98 event, when palm oil prices doubled.

Production may decline in the first and second quarters of 2016 as the moisture deficit from El Nino and a low yielding period from January starts to affect crops, according to Dorab Mistry, director at Godrej Industries Ltd. Palm imports by India, the world's biggest buyer of edible oil, will rise to 9.6 million tonnes in India's 2015-2016 marketing year from 8.7 million tonnes this year, Mistry said.

Palm oil rallied to the highest since June 2014 last month, up 19% in September after falling 6 % in August. Brent crude fell 11% in September and the LMEX Index of six main industrial metals fell for a fifth month, contributing to a 3.4% drop in the Bloomberg Commodity Index. The Bloomberg Agriculture Subindex advanced for the the first month in three.

Sugar was the only commodity to outstrip palm oil in September - with futures on ICE Futures U.S. climbing 20 %, the most since October 2010.

The surge has boosted shares of palm producers. Sime Darby Bhd, the world’s biggest planter, rose 4.6% in September in Malaysia.

Golden Agri-Resources Ltd climbed 4.8 % in Singapore and PT Astra Agro Lestari Tbk gained 5.8% in Indonesia. That's as the and Global Natural Resources Index, which tracks 90 of the largest publicly traded resource and commodity companies, slumped 9.8% over the same period.

Prices may extend gains should Malaysia's ringgit weaken further, said Godrej's Mistry, who has traded cooking oils for more than three decades. Palm oil is priced in RM and the declines in the currency make it cheaper for overseas buyers.

The currency dropped 4.6% in September to cap the biggest quarterly loss since 1997 as a slump in Brent weighs on earnings for the region's only major net oil exporter.

Even without El Nino, crude palm was seen rising above US$600 a tonne in the first quarter of 2016, and the event can take them above US$700 by mid-2016, James Fry, chairman of LMC International Ltd said Sept 29.

Futures rose 2.6% to RM2,437 (US$553) a tonne on Bursa Malaysia Derivatives at 4:39 pm in Kuala Lumpur.

“Prices will climb as production is expected to decline from now on, while El Nino worries remain and demand continues to grow,” said Sandeep Bajoria, Chief Executive Officer of Mumbai-based broker Sunvin Group. “A weaker ringgit is also aiding the market.” — Bloomberg