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Malaysian palm kernel oil set for fresh surge as buyers return

By Emily Chow

KUALA LUMPUR, March 17 (Reuters) - Malaysian palm kernel oil prices look set to climb up out of a trough as industrial buyers flock back to the soap and detergent ingredient after it regained a steep discount to rival oils.

Kernel oil prices have tumbled by a third from a record high hit in late January, bringing back its competitive edge versus coconut oil and other substitutes.

Oleochemical buyers primarily use palm kernel oil in detergent, soap and cosmetics production, but when prices surge, they have little scope to pass on higher input costs in the highly competitive consumer goods sector.

Now demand looks set to pick up sharply as the slump since January has left kernel prices trading near their largest ever discount to coconut oil, enticing buyers back - albeit with concerns about more price rises.

The recent price drop was a demand-based correction rather than due to a recovery of supplies, and now "demand will become more competitive," said a director of a Malaysian firm that manufactures oleochemicals as well as soaps and detergents.

"Customers won't accept (these kinds of) drastic (price) increases so we have to play around with composition of products to ensure prices stay the same," the director said, explaining the volatile up-and-down swing in the kernel oil market.

Palm kernel oil prices surged by 50 percent between October 2016 and late January 2017 to a record high at 8,463.79 ringgit a tonne (PKO-MYSTH-M1), as the lingering effects of a 2015 drought tightened crude palm oil supplies and led to a drop in kernel oil output and stocks.

The rally pushed kernel oil to its first large premium over coconut oil in more than five years, turning buyers to other oils and ultimately triggering the slump in demand that drove kernel oil prices to a seven-month low of 5,241.47 ringgit on Feb. 28. On Friday, kernel oil was last at 5,555.63 ringgit.

During the price surge, soap and detergent makers had to scramble to change ingredients or dial down production to prevent cost overruns.

"Oleochemical manufacturers slowed down manufacturing because of the high prices, to an extent of shutting down plants. Some scheduled plant shutdowns as well," said a manager at another oleochemicals manufacturer in Malaysia.

(Reporting by Emily Chow; Editing by Gavin Maguire and Tom Hogue)