Palm oil is set to drop 8.8 percent to the lowest level in 22 months as a slowdown in China and India, the top users, curbs demand and rising Malaysian output boosts inventories, said an analyst at Frost & Sullivan.
Prices may decline to 2,700 ringgit ($862) a metric ton in the next three weeks unless crude oil rises, which would make palm more attractive as a biofuel, said Global Vice President of Consulting Chris de Lavigne, who correctly forecast in December that futures would reach 3,500 ringgit in the first half before declining below 3,000 ringgit. Prices were last less than 2,700 ringgit in October 2010.
Palm oil, used in everything from Nestle SA’s (NESN) Maggi instant noodles and Unilever’s soaps, to candy bars and biofuels, has tumbled 18 percent from a 13-month high in April as Europe’s debt crisis and a global slowdown reduced demand, cutting profits at Wilmar International Ltd. (WIL), the largest processor. The outlook is similar to a forecast made in June by Dorab Mistry, director of Godrej International Ltd.
“I don’t really see any catalysts for palm prices to go much above 3,000 ringgit,” de Lavigne said in a phone interview from Singapore on Aug. 14. “There’s a lot of supply. Until we see a more buoyant global economy and higher crude oil prices, I don’t foresee CPO making a bounce back,” he said, referring to crude palm oil by its initials.
The November-delivery contract climbed 0.7 percent to close at 2,962 ringgit a ton on the Malaysia Derivatives Exchange, the highest settlement price for the most active-contract since July 31. Futures fell to a 10-month low of 2,820 ringgit on Aug. 14 and are heading for a fourth monthly decline, the longest losing streak since October 2008. The price reached 3,628 ringgit on April 10.
China’s economy expanded 7.6 percent in the three months ended June, the slowest pace in three years. India grew 5.3 percent in the first quarter, the least since 2003. Inventories in Malaysia, the top producer after Indonesia, rose 17.6 percent, the most in almost two years, to 2 million tons in July from June, while output rose for a fifth month, climbing 15.1 percent to 1.69 million tons, the Palm Oil Board said.
Singapore-based Wilmar reported Aug. 14 a 70 percent net- income drop in the second quarter, because of losses in the oilseeds and grains business and on lower plantation earnings.
Palm oil could slump to as low as 2,700 ringgit a ton in the absence of fresh stimulus by the U.S. and rebound to 3,300 ringgit as the decline spurs demand, said Mistry on June 7
“We’re seeing a temporary rally up to 3,000 ringgit on the back of the huge discount between palm and soy oil,” said Gnanasekar Thiagarajan, a director at Commtrendz Risk Management Services Pvt. in Mumbai. At that level, “prices will come back down again as stocks increase and exports go down because the festival season in India is only in November. You’ll only see people stocking up in October. Till then, you’ll find a period of weakness” and prices may dip below 2,700 ringgit, he said.
The worst drought in more than half a century in the U.S., which drove soybeans in Chicago to a record on July 23, and the weakest monsoon in India since 2009 could limit declines in palm oil prices. Soybean oil’s premium over palm oil widened to $275.19 on Aug. 10, the most since September.
“Given our bullish view on soybeans and an appreciating physical basis, we expect palm oil to be well supported near $900 a ton,” Australia & New Zealand Banking Group Ltd. (ANZ) analysts including Paul Deane wrote in a report dated Aug. 15.
Purchases of vegetable oils by India in the year starting Nov. 1 may exceed the 9.5 million tons estimated for this year, according to B.V. Mehta, executive director at Solvent Extractors’ Association. Palm oil comprises almost 80 percent of the country’s cooking-oil imports.
Palm prices may see a temporary increase before the festival season in India and China as the discount to soybean oil may boost demand, said de Lavigne. China celebrates the Mid- Autumn festival at the end of September and India’s Diwali falls in November. The tropical oil is unlikely to trade above 3,200 ringgit again this year unless tensions in the Middle East spur an increase in crude oil, he said.
Malaysian stockpiles may not drop below 2 million tons in August and September as supply will be “quite good” in the two top producing countries, said de Lavigne. Output typically peaks between July and October.
Frost & Sullivan, a consulting company based in New York, was commissioned by Felda Global Ventures Holdings Bhd. (FGV), the world’s third-biggest plantation operator, to provide a palm oil, rubber and sugar overview for its prospectus before its $3.3 billion initial public offering in June.
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