October 5, 2016 / 8:46 AM / 10 months ago

UPDATE 1-High palm stearin prices causing a stink on slower soap demand

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By Emily Chow

KUALA LUMPUR, Oct 5 (Reuters) - Prices of palm stearin have soared to a two-year high on supply shortages, causing oleochemical manufacturers - who use the ingredient as a feedstock to make soap - to face tightening margins and slower demand for their products.

Prices of refined, bleached and deodorized (RBD) palm stearin have soared by nearly 40 percent this year, according to assessment prices by Thomson Reuters PSTR-MYRBD-M1. Stearin is a solid fat produced when refined palm oil is broken down to extract palm olein, or the liquid form of palm oil used for cooking and baking.

It usually trades at a discount to crude palm oil (CPO) but surpassed benchmark prices of the tropical oil in June. Stearin's spread over CPO reached $87 a tonne in late August, the widest since 2011.

Stearin prices were at $700 a tonne on Tuesday, while crude palm oil values were at 2,587 ringgit ($625) a tonne at the midday break on Wednesday.

Oleochemical manufacturers say it is not easy to pass on higher stearin prices to price sensitive customers, resulting in compressed margins.

Palm stearin is widely used in Malaysia to make soap noodles, a basic form of soap bought by manufacturers to make their own branded product.

"Demand is more subdued now, people are not committing far in advance and mostly go on a hand-to-mouth basis," said a Malaysian oleochemical manufacturer.

"We are also affected. We don't have forward orders. We don't dare to ramp up the plant to produce materials."

Malaysia is the world's second-largest palm oil producer after Indonesia, but output fell this year because of the effects of the El Nino weather pattern, which brings scorching heat across Southeast Asia and impacts crop yields.

Lower production results in less availability of palm oil to process, said three traders and a biodiesel producer, while higher Indonesian biodiesel mandates means more palm stearin is consumed as a feedstock.

Indonesia raised the minimum bio content for diesel fuel to 20 percent this year and aims to raise it to 30 percent in 2020.

Sahat Sinaga, the chairman of the Indonesian Vegetable Oils Association, said the biodiesel mandate is not the sole reason for the increase in palm stearin, "because Indonesia's biodiesel consumption this year wouldn't be as high as targeted."

He estimates that Indonesia's biodiesel consumption this year will be 1.8 million kilolitres versus a targeted 5 million kilolitres.

"But stearin's price increase will affect the industry as a whole in terms of end product prices," he said. ($1 = 4.1395 ringgit)

Additional reporting by Bernadette Christina Munthe in JAKARTA; Editing by Christian Schmollinger

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