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iFAST Research says Malaysian commodities not promising in 2009 despite outperforming in January this year

Posted on 27 February 2009

From Komfie Manalo, Opalesque Asia: A study made by iFAST Research Team and published on Fundsupermart.com in January said that the Malaysian commodity market was not promising in 2009. The study entitled: “Malaysia Commodities Updates – A Cyclical Downturn,” said that in the short to medium term, Malaysian commodities depended on the magnitude and duration of the economic downturn.

Without a hint of convergence to steadiness, it is hard to anticipate when the commodity market will start to recover. The future price movements of both crude oil and palm oil are reliant on various factors, the study said. Besides the demand and supply factors, substitution effect and speculation on commodities also contribute to price movements.

The researchers said they were not able to predict when the down cycles of both commodities prices would come to an end. Both crude oil and palm oil are currently trading at a level below their cost of production.

Impact of lower palm oil prices on the Malaysian economy
Palm oil prices have a strong positive correlation with economic growth. Higher palm oil prices would be good for the Malaysian economy as rising palm oil prices would help to increase export revenue. Lower palm oil prices will not bode well for families that are involved in the cultivation and manufacturing process of palm oil. Plantation companies contributed about 8% to the total market capitalization of the KLCI Index.

Sluggish outlook for palm oil
According to iFAST, demand for palm oil will be lower this year because of slowdown in the economies of major exporters. China, the largest exporter of Malaysia’s palm oil, is expected to grow at a slower pace of 8.5%. The remaining top 10 exporters are Pakistan, Netherland, the U.S., India, Japan, Jordan, Ukraine, the UAE and Singapore. With countries like the U.S., Japan, Singapore, and some European countries falling into a recession, and most countries generally growing more slowly, demand recovery will not be immediate, the study said.

Supply is also affected because of the rising cost of production. Some plantations have stopped cultivating or discontinued fertilizing activities.

Impact of oil prices on the Malaysian economy
Lower crude oil prices would mean lesser government revenue and lower government expenditures. The government would then have to borrow from debt markets to fund future spending.

High oil prices hurt the consumer because of high inflationary pressure. Malaysia experienced an all-time-high inflation rate of 8.5% in July and August 2008 after the government raised the petrol price by a whopping 41% to $0.72 per liter.

Crude oil outlook
iFAST researchers cited figures released by the U.S. Energy Information Administration in November 2008, which said that the short term outlook for both energy demand and prices would be weaker on deteriorating growth prospects and continuous withdrawal of funds from commodity markets.

For the coming 12 months, the weaker demand will be the dominant factor for lower crude oil prices apart from the ability of OPEC to restrain supply. In the short term, iFAST expects oil prices to remain at depressed levels but added that such low prices were not sustainable for the medium to long term.

Malaysia commodities lose out in 2008
Data released by Thomson Reuters Lipper showed that commodity funds in Malaysia posted an average decline of 33.3% in 2008 and an average gain of 4.61% last month, said Asianinvestor.net.

A report by Asianinvestor.net (Opalesque 30-Jan-09), said that mutual funds registered for sale in Malaysia declined by an average of 22.28% last year. (fundsupermart.com.my).


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VRS - who has written 37629 posts on Opalesque Commodities Briefing.


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