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Palm Oil to Climb as Demand Outstrips Production, Mistry Says
Palm oil must jump at least 19 percent to discourage imports by India and China, the world’s largest consumers, as production will be little changed this year, according to Godrej International Ltd.
“Futures will need to trade close to 3,000 ringgit, and then perhaps even climb above that” to dissuade buyers, Dorab Mistry, a director at Godrej, said in remarks prepared for delivery at a conference today in Belem, Brazil.
The tropical oil used in cooking and fuel climbed to 2,756 ringgit a metric ton ($877) on Aug. 16, the highest level in 15 months, and closed at 2,530 ringgit today. The advance was fueled by optimism demand will climb in Asia, which has festivals in the quarter ending Sept. 30, and on concern rain will disrupt output in Indonesia and Malaysia, the top producers. Malaysian inventory in July fell to the lowest level in a year.
“We can’t draw down stocks so dramatically once again this year, so prices must rise in order to curb or reduce additional demand,” said Mistry, who forecast in March that palm oil would rise in the second half. He said then prices may trade between 3,000 ringgit and 3,200 ringgit after June. Godrej is one of India’s biggest cooking oil importers.
Production in Malaysia will drop 2 percent to 17.2 million tons this year, while output in Indonesia may grow by 500,000 tons, Mistry said, cutting a previous forecast for an increase of 1 million tons. That compares with a 10 percent drop forecast by the Indonesian Palm Oil Association on Aug. 12.
Zero Growth
“From July onwards some sanity has begun to prevail as month after month, our so-called experts were proved wrong and crude palm oil production failed to expand,” Mistry said. “I am now forecasting zero growth in world palm oil production” for this year, he said.
Palm oil is up 11.5 percent from a near eight-month low on July 7 in Kuala Lumpur and soybean oil climbed to a 22-month high on Aug. 13 in Chicago, part of a “strong catch-up rally” in vegetable oil prices, Mistry said. The oils are substitutes in food and fuel applications.
“Crude palm oil production during the Ramadan period will be flat to lower and recovery will have to wait until October,” Mistry said. Damage to canola crops from weather disruptions in Canada, Europe, Russia, Ukraine and western Argentina may help increase prices of canola, sunflower and coconut oils, he said.
Free-on-board Argentine soybean oil prices may advance to $1,050 a ton from about $1,000 at present, maintaining a “healthy premium” over palm oil, Mistry said. Prices of canola and sunflower oils will climb closer to $1,200 a ton, he said.
Biofuel Demand
Soybean oil is $80.63 a ton more expensive than crude palm oil, compared with an average of $112 a ton in the past year, Bloomberg data show. December-delivery futures added 1.2 percent to 40.19 cents at 9 p.m. Singapore time.
Global vegetable-oil demand will increase by 6 million tons this year, he said, aided by the world economic expansion of 4.6 percent predicted by the International Monetary Fund. Food oil and biofuel demand may grow by 4 million tons and 2 million tons, more than the supply increase of 2.3 million tons, Mistry said.
Efforts to boost the output of so-called environmentally sustainable palm oil are slowing the expansion of plantations, Mistry said. Oil palms are being planted on an average 250,000 hectares a year from 650,000 hectares earlier, he said.
“This slowdown in growth has profound implications for future world supply of palm oil in particular and of vegetable oils overall,” Mistry said. “A wholesale switch to supplying sustainable palm oil will go a long way toward removing or at least narrowing” the discount to other vegetable oils, he said.
Unilever and Nestle SA, which aim to buy only sustainable palm oil by 2015, have stopped supplies from Sinar Mas Group after Greenpeace said the Jakarta-based company was contributing to climate change and destroying the habitat of Sumatran tigers. Sinar Mas has denied the allegations.
To contact the reporter on this story: Thomas Kutty Abraham in Mumbai at tabraham4@bloomberg.net
To contact the editor responsible for this story: James Poole at jpoole4@Bloomberg.net.
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