Palm oil, used in everything from candy to biofuels, is set for the largest annual decline in four years as inventories surge in Indonesia and Malaysia, the biggest producers, and a global economic slowdown curbs demand.
Futures in Malaysia, the global benchmark, plunged as much as 6.7 percent to 2,577 ringgit ($839) a metric ton today on the Malaysia Derivatives Exchange, before ending at 2,646 ringgit. The intraday slump exceeded the median estimate of a decline to 2,600 ringgit by December in a Bloomberg survey of 11 analysts and importers who attended an industry conference in Mumbai yesterday. A year-end close at 2,600 ringgit would show a loss of 18 percent, the biggest decline since 2008.
Palm oil, the world’s most-used cooking oil, has slumped as demand slowed from importers including China and the European Union, and stockpiles surged because of an increase in production. The plunge may cut revenues for producers including Sime Darby Bhd. and IOI Corp. and cap increases in food costs.
“Demand for palm oil in particular, and for vegetable oils in general has been softer than expected in 2012,” said Dorab Mistry, director at Godrej International Ltd., who has traded palm oil for more than three decades. Demand was hurt by slower growth in the production of biofuels from vegetable oils and a slowdown in economic growth in the developing countries amid high prices, he said.
Intraday futures tumbled today to the lowest since 2010. The low surpassed Mistry’s prediction yesterday that he expected futures to drop to 2,600 ringgit to 2,700 ringgit a ton by December. The probability of a drop to 2,300 ringgit has risen to 50 percent from 20 percent in June, he said.
The tropical oil has fallen 23 percent since the end of March and is heading for a second straight quarterly decline on concern that a pick-up in production will drive stockpiles in Malaysia and Indonesia to records.
Stockpiles in Malaysia will continue to expand in October, November and December and may reach as high as 3 million tons by January, Mistry said. Inventories in Indonesia have hovered between 3.5 million tons and 4 million tons since 2010 as against popular estimates of 1.5 million tons to 2 million tons, he said. Production in Indonesia may climb to 27.5 million tons in 2012, higher than the 27 million tons estimated on Sept. 6, while Malaysia’s output may be 18 million tons, less than the 18.2 million tons forecast previously, he said.
“The supply position on palm oil is therefore extremely comfortable and is likely to remain that way for the next several months,” Mistry said.
Prices may drop to 2,500 ringgit a ton by December because of rising stockpiles, said Dinesh Shahra, managing director of Ruchi Soya Industries Ltd., the country’s biggest importer of cooking oils. Futures may slump to 2,575 ringgit in the fourth quarter if Brent crude falls to $95 a barrel, according to James Fry, chairman of LMC International Ltd.
“There is a large potential for prices to go down substantially,” Shahra said on Sept. 22. “There is a slowdown in China, and Europe has slowed purchases for biodiesel. The discount between soybean oil and palm oil will further widen.”
The gap between the two oils widened to $329.61 a ton today, the most since 2008, data tracked by Bloomberg showed. The record is $493.76 in August 2008. Soybean oil and palm oil are used in foods and fuels.
Global vegetable-oil supplies will increase by 3.05 million tons in 2012-2013, while demand may expand by 3.5 million tons, Mistry said. Soybeans may reach a record $20 a bushel in December or January and drop with the swelling of harvests in Brazil and Argentina, he said.
Sunflower oil prices will remain in line with soybean oil and compete for market share in importing countries such as Iran, Egypt, parts of the Middle East and India, Mistry said.
Cooking oil imports by India, the largest palm oil buyer, may climb to a record 10 million tons in the oil year ending Oct. 31 on lower domestic oilseed output, Mistry said. Stockpiles in India at the end of October will be higher than in previous years, he said.
Vegetable-oil imports climbed 19 percent to 8.16 million tons between November and August, according to the Solvent Extractors’ Association of India. Stockpiles, including those at ports and in the pipeline, totaled 1.55 million tons as of Sept. 1, it said on Sept. 14.
The 33 percent jump in soybean futures this year is set to reduce demand. Global consumption will drop about 3 million tons in 2012-2013 because of record prices, according to Thomas Mielke, executive director of Oil World.