Friday, August 27, 2010

Strong ringgit to hurt palm oil refiners?

KUALA LUMPUR: Palm oil refining margins in No 2 producer Malaysia could turn negative after the ringgit hit a 13-year high last week ' a scenario that might see refineries cut back on output.

The ringgit, Asia's second-best performer, has rallied 8.9% so far this year thanks to recent moves to allow the currency to be used more widely, interest rate hikes and an inflow of funds into local bonds.

But the appreciating currency hastened a sell-off in benchmark Malaysian palm oil futures last week, triggering concerns that refiners may take up less crude palm oil (CPO) priced in the ringgit for processing and export in US dollars.

Here are some questions and answers on the currency's impact on Malaysia's US$25 billion (RM78.5 billion) palm oil industry:

Can further ringgit rise hurt refining margins?
Refiners say the ringgit hitting 3.0 per dollar from 3.1370 now will erase the current US$38-US$45 a tonne margin made from producing refined, bleached and deodorised palm olein, which is widely used as a cooking oil.

That level for the ringgit may not be far off. Analysts say the ringgit may rise to 3-3.05 per dollar in the medium term as the Bank Negara Malaysia is expected to release forex controls with other nations in trade settlements.

Any 0.3% increase in the ringgit will erode refining margins by US$3 a tonne, refiners and traders said.

Does the ringgit largely determine margins?
To some extent, but margins are also determined by availability of CPO and its end-products as well as demand.

Refined palm oil products rallied over the past two months due to tight supplies after refiners trimmed production in the second quarter to below 70% of the 22.8 million tonnes of total capacity versus 74% in the first quarter.

Improving CPO output from September or October may lead to a stock buildup and weigh on feedstock prices, prompting refineries to process more.

But aiming for margins above the breakeven point of US$40-US$50 a tonne will depend on securing big orders from top consumers, India and China.

In these two Asian giants, demand has slowed and buyers are relying on domestic oilseeds or importing more soyoil that has narrowed its premium to RBD palm olein.

What is the impact on the palm oil industry?
Palm oil firms with refineries and estates could focus more on selling CPO rather than refined products to avoid further costs.

Profits could get dented for planters with extensive refineries such as Singapore's Wilmar if the ringgit strengthens. The firm posted its first quarterly decline in four years due to tight edible oil supply.

Winners are more likely to be firms focusing solely on oil palm estates such as IJM PLANTATION []S BHD [] and Genting Plantations Bhd. Their profits may grow as they focus on selling CPO priced in ringgit. ' Reuters

No comments:

Post a Comment