The price of palm oil has rallied 7 percent in the past fortnight as a cloak of smog, combined with unusually dry weather, disrupts supply in key Southeast Asian producing countries, and analysts say the gains are set to continue.
Futures on the Bursa Malaysia Derivatives Exchange shot up to a one-week high of about $508 a metric ton on Wednesday, a sharp turnaround from a six-year low of $426 plumbed in late August. Bursa Malaysia is the world's biggest palm oil futures trading hub.
Many experts now expect the edible oil to close out the year higher: Religare Institutional Research's year-end target is around $750 a ton, while others like CIMB and Nomura expect more gradual gains to $513 and $529, respectively.
Palm oil, derived from the palm fruit, is used as a raw material in everything from food products to detergents, cosmetics and biofuel. Global palm oil exports last year was valued at $34 billion, according to reports.
Indonesia and Malaysia are two of the world's biggest producers but the region's seasonal haze is lowering production.
Every year, farmers in Indonesia engage in the 'slash-and-burn' technique of cutting down vegetation on a patch of land, then burning off the undergrowth to make space for new plantations. While it is the easiest, fastest and most cost-effective way to clear land, the use of fire is deemed illegal by the Indonesian government since it produces a dense layer of smog across the country as well as over Malaysia and neighboring Singapore, sending air quality readings to alarmingly low levels.
Increased public complaints about the pollution this year have whipped Indonesian President Joko Widodo's administration into action. A supplier of Golden Agri Resources, the world's second largest oil palm company, was sanctioned this week for allegedly causing forest fires. More than 200 plantation and forestry companies are currently being investigated, according to local media reports, including one Singapore-listed firm.
As for the impact on the palm fruit, "heavy haze reduces the amount of sunlight reaching the trees and disrupts harvesting during the peak production season," explained Nomura analyst June Ng.
As a result of the smog, companies are finding it difficult to bring their workers to plantations, which is reducing productivity and further weighing on production, added Nirgunan Tiruchelvam, research director at Religare Capital Markets.