Hope For A Rosier Year Ahead For Commodities After A Volatile 2016

By S. Joan Santani KUALA LUMPUR, Dec 20 (Bernama) -- The year 2016 saw the commodity sector, except for crude palm oil and metals such as tin and good, reel under the pressure of lower prices, sluggish demand, volatile global uncertainty and weaknesses. In the first half of 2016, crude palm oil (CPO), tin and gold prices recovered but rubber and that of crude oil remained in the doldrums. Nonetheless, various supply-demand drivers lifted selected commodity prices into the third quarter of this year and this should lead to a price recovery in 2017. During the year, like many other commodities in the world, palm oil was affected by the El Nino and La Nina phenomenon, bearish demand routed by slower growth in global markets, geo-political issues and currency fluctuation. The El Nino phenomenon disrupted CPO supply by an average 12 per cent in Malaysia which saw volatile prices as global demand outstripped supply. CPO prices ranged between US$546 (RM2,450) per tonne in the first half of 2016 and US$591 (RM2,650) in the second half. (US$1 = RM4.47) During the year, the Roundtable on Sustainable Palm Oil (RSPO) came down hard on palm oil suppliers by suspending or causing some suppliers to withdraw their products from their buyers' supply chains. The knee-jerk reaction from a segment that attracts premium prices for RSPO products caused the premium to rise by more than 100 per cent. The ringgit's volatility also played a role in supporting palm oil prices besides the various supply-demand factors. Meanwhile, Malaysian palm oil is expected to see a 10 per cent contraction in production this year to 17.8 million tonnes as producers continue to struggle with lower output from the harsh El-Nino weather in 2015 across Southeast Asia. Leading industry analyst and ISTA Mielke GmbH Executive Director Thomas Mielke said oil palm yield were expected to recover in Malaysia next year, albeit, at a slow pace. "The industry needs to wait until 2018 to see yield normalise after being badly impacted by the prolonged drought caused by the El-Nino weather, he told Bernama. Saying that palm oil prices were undervalued, Mielke had forecast a rally soon which will see the commodity fetching between RM2,900 and RM3,000 per tonne. Low palm oil stocks, export supplies and a slower-than-expected recovery in production saw CPO prices touch a high of RM3,098 per tonne in 2016 against RM2,508 last year. After seeing steady prices in 2016, another industry player said palm oil production was set to rebound in 2017 which would then pressure prices downwards to around RM2,500 per tonne level. At RM2,500 per tonne, the palm oil industry is set to maintain a good bottom line in spite of the limiting factor in exports. On the flipside, the expected higher production, post El-Nino, in the third quarter of 2017, will limit the price recovery as output is expected to improve by 15 per cent in the second half of 2017. As for the rubber industry, the commodity was also affected by low global commodity prices, surging production and subdued demand in 2016 with tyre grade SMR 20 contracting 47 per cent from January to November compared with 18.9 per cent in the same period of 2015. Unfavourable external factors such as slow global economic growth, low crude oil prices, strong US dollar and poor sentiment in futures trade had further pressured the physical market. During the year, SMR 20 peaked at RM8.07 per kg on Nov 24 and dipped to a low of RM4.26 per kg on Feb 11, prompting the government to implement the Rubber Production Incentive. The incentive will be activated when the monthly average SMR 20 price is at the level of RM5.50 per kg or the farm-gate price is at RM2.20 per kg or less. Against this backdrop, the Malaysian Rubber Board said the government decided to implement four entry point projects (EPPs) under the National Key Economic Areas (NKEAs) in a move to stabilise NR prices. Other efforts included maintaining the production area of one million hectares, increasing the average yield and approving RM10 million to increase latex production. On the downstream sector, the Malaysian rubber industry recorded a marginal contraction of 2.2 per cent in exports to RM23.88 billion in the first three quarters of 2016. Exports of other sectors like rubber products, other rubber and heveawood products recorded a growth of 1.3 per cent, 2.8 per cent and 0.7 per cent, respectively. Demand for natural rubber was noted from developed nations and developing countries like China and India. As for demand for Malaysian rubber and rubber products in 2017, MRB said it was expected to increase marginally with export earnings estimated to increase to RM33.5 billion from RM31 billion forecast for 2016. Turning to the tin market, although cast by the same fate as other commodities in terms of prices, the metal touched its highest price of US$22,000 per tonne in November and the lowest of US$13,250 in June on the Kuala Lumpur Tin Market (KLTM). Hence, traders also expect the metal to remain a stellar next year based on expectation of a rebound in demand from European, Japanese, China and local interest. As for gold, the glitter fizzled out with US dollar sky rocketing to greater heights while oil prices plummeted to a record low, prompting the Organisation of Petroleum Exporting Countries to gets its members and non-members to cut back on production to shore up prices. It is no more a safe haven asset as the US Federal Reserve announced a 25 basis points increase in interest rates which would further strengthen the US dollar. Phillip Futures Sdn Bhd Dealer Chu Ching Yong said gold futures was traded at a high of RM180.40 per gramme and a low of RM147.60 on Bursa Malaysia Derivatives. "Higher interest rates usually dampen the price of precious metals," he said, adding that Bursa gold futures may recover to reach a new high as the ringgit weakens further. Meanwhile, Bank Negara Malaysia (Malaysia's Central Bank) is expected to reduce interest rates in 2017 to stimulate the economy. "We would expect Bursa gold futures to trade within the range of RM160.00 per gramme and RM195.00 per gramme in the coming year," Chu added. -- BERNAMA