Palm oil rallies on strong exports and Indonesian policy worry

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Palm oil snapped a two-day drop on optimism that Malaysian exports will be robust this month, and on concerns that potential Indonesian policy changes could limit supplies from the biggest shipper.

The gains this morning are mainly due to the strength in Malaysia's export performance this month, according to David Ng, a senior trader at IcebergX Sdn in Kuala Lumpur. After the end of the morning session, Intertek Testing Services reported shipments climbed 14% during March 1-25 from a month earlier, thanks to stronger demand from Africa, India and the Middle East. AmSpec Agri will release data for the same period later Monday.

The market is also waiting for clarity on Indonesia's plan to tweak its domestic market obligation policy, known as DMO, Ng said. The government is mulling a revision in the policy by linking it to production, instead of exports, Edy Priyono, deputy at the presidential staff office, said in Jakarta on Monday.

The rule currently allows companies to export some palm oil products after supplying certain volumes of cooking oil domestically, but the policy is vulnerable when export demand slows down, Priyono said. Linking the DMO to output will help prevent impact from the global market, he added.

"We'll especially want to know how much quota is being allocated based on the production," IcebergX's Ng said. "With this policy in place, it looks like supply will be pretty much domestic-driven rather than export-oriented, and could mean that supply availability from Indonesia may be restricted going forward in order to safeguard domestic prices."

Source: Bloomberg