Malaysian palm oil futures edged up on Tuesday, coming off a more than one-week low hit earlier as higher overseas sales underpinned prices.
KUALA LUMPUR: A hike in Malaysia's crude palm oil export tax for October is expected to dampen already weakening demand for the tropical oil, but likely below-average output in coming months could support prices.
Crude palm oil (CPO) prices have risen about 9 percent since July due to tight supplies following last year's El Nino dry weather pattern, which damages crops across Southeast Asia and lowers palm yields.
The price rise led the world's No.2 producer after Indonesia to increase its October CPO export tax to 6.5 percent from 5 percent in September. The tax kicks in at 4.5 percent when a calculated palm oil reference price tops 2,250 ringgit a tonne and stops at 8.5 percent.
"The main question now is are we able to export? Exports have already been dropping and consumers are not buying at these high levels," said a trader from Kuala Lumpur, adding that the higher tax will further dampen demand.
"Furthermore soy is showing signs of weakness. When you have competing oils coming down, consumers have avenues to look for alternatives," he added.
A narrowing spread between palm and its rival oilseed soy, which could narrow further on growing soybean supplies, makes soyoil a more attractive choice for buyers.
Palm oil shipments for the first half of September fell 8.7 percent on slowing demand from India, the largest buyer of Malaysian palm oil, according to cargo surveyor Intertek Testing Services.
Traders said demand was expected to slow in the next two months even without the export tax hike.
"Last month we saw India pick up on restocking activities. Current port levels suggest there's no need for further buying," said David Ng, derivatives specialist at Phillip Futures.
"At China, port levels are relatively high, indicating restocking activites could be lower ahead of winter season."
The lingering impact of El Nino, however, could offset the slowdown in demand, helping to keep stockpiles around current levels after they fell to a near six-year low in August.
Palm oil production in August grew 7.3 percent to 1.7 million tonnes from a month earlier, in line with seasonal trends, but was at its lowest August level since 2012.
"Already some regions in Peninsular Malaysia are experiencing a drop in the oil extraction rates, thus it is supply constraints that is pivotal versus any other variable," said Lingam Supramaniam, director at Malaysia-based commodities firm Pelindung Bestari.
Malaysia calcuated the October reference price at 2,879.47 ringgit. Benchmark palm oil traded 0.6 percent higher at 2,580 ringgit ($625) a tonne at noon on Thursday. ($1 = 4.1250 ringgit) - Reuters
Limited time offer:
Just RM5 per month.
