Wednesday June 8, 2:45 PM KUALA LUMPUR (Dow Jones)--A stronger Malaysianringgit is likely to hurt the price of crude palm oil, with some of thedownward pressure already being felt amid speculation of a revaluation,industry participants said.
Malaysia is the world's biggest producer of CPO.
"This issue is quite crucial for an export-oriented business like oursbecause we make all our sale in U.S. dollars. If the ringgit is going tobe repegged at a higher value, it is going to affect us because afterconversion, the dollars we earn will be worth less in ringgit terms," U.R.Unnithan, executive director of palm oil processor Carotino Sdn. Bhd.,said in a recent interview.
At the height of the Asian financial crisis, Malaysia imposed in 1998sweeping capital controls, including the fixing of its ringgit exchangerate at 3.8 to the U.S. dollar.
Today, most of the restrictions have been rolled-back, but the ringgit pegstill stands.
But if recent talk in financial circles is anything to go by, then achange in the country's currency policy may not be far away.
There has been widespread speculation that the ringgit may be revaluedthis year, partly in reaction to a potential adjustment of another fixedcurrency -- the Chinese yuan, which China's trade partners say isundervalued.
Like the yuan, the ringgit is also thought to be weaker than it should beand has been tipped by analysts as ripe for a change, though so far, theMalaysian government has sought to downplay the revaluation rumors.
Palm oil industry participants are already bracing for a move by thegovernment as any appreciation of the ringgit would have a direct impacton the price of CPO.
Malaysia's refiners produce a range of refined palm oil products which arethen sold, in dollar terms, to major markets like China, India and theEuropean Union.
In the event of a ringgit revaluation, there will be hardly any room forMalaysian refiners to raise the dollar price of their products as theywould risk losing customers to rival producer Indonesia.
"Unless there is an immediate jump in the U.S. dollar-priced products, theringgit-based CPO will have to dip accordingly to adjust to the currencyvalue," a Singapore-based trader said.
Currently, spot CPO is sold in Malaysia at MYR1,400/ton while RBD palmolein, the main exported product, is sold at about $400/ton, whichtranslates to MYR1,520.
Assuming the ringgit is revalued upward to 3.5/dollar, as some havespeculated, the value of RBD palm olein would fall sharply toMYR1,400/ton.
After factoring-in refining costs, refiners would only be able to payMYR1,280 for CPO, the trader said.
In short, a 10% revaluation of the ringgit could potentially trigger afall of around MYR120 /ton in the price of Malaysian CPO.
In 2004, Malaysia exported 11.3 million tons of processed palm oil worthMYR20.05 billion, or $5.3 billion.
Producers Taking Cover
Facing the prospects of a drop in prices, industry players in Malaysiahave been taking steps in recent weeks to protect themselves from anysudden shocks, including hedge-selling in the CPO futures market.
That selling pressure has prevented CPO futures from following a rally inrival soyoil futures, traders said.
The benchmark August CPO contract has been flat to slightly lower sincemid-May even as soyoil futures have risen 4% to 5% during the same period.
As a precaution, CPO producers, who will suffer the most from a ringgitrevaluation, have capitalized on any rally in CPO futures to sell and thathas somewhat limited the upside for prices, traders said.
At the same time, expectations of a change in the ringgit peg have alsodamped buying interest in CPO futures.
"As far as the buyers are concerned, they are also cautious because theydon't want to get caught holding large open long positions when theringgit is suddenly repegged," a trader at a large regional trading housesaid.
Still, a stronger ringgit isn't all bad news for the Malaysian palm oilindustry.
Producers may earn less from the sale of CPO as a result of the currencyappreciation.
However, they stand to gain in other ways as a stronger ringgit makesimports of goods like fertilizers, machinery and equipment cheaper,helping to reduce production costs, industry participants said.
It is estimated that fertilizer application accounts for well over 20% ofthe production cost of fresh fruit bunches, from which CPO is derived.
Ideas that a ringgit revaluation would be preceded by an appreciation ofthe Chinese yuan is also another reason for the industry to remainpositive, they said.
China, the biggest consumer of palm oil, could step up purchases in comingyears as a stronger yuan boosts spending power there.
To be sure, palm oil industry players will continue to closely monitordevelopments in financial markets in the weeks to come for indications onthe fate of the ringgit.
"As long as there is this possibility (of a ringgit appreciation), priceswill not be able to go up much," specialty oils and fats maker WawasanTebrau said in a market report, adding that "it will take a really bigpiece of friendly news to push prices up."