Palm, the world’s most-consumed cooking oil, is set to rally as much as 21 percent in the next eight months as a pickup in global demand and a decline in output reduce record stockpiles, according to Sime Darby Bhd.
Futures in Malaysia, the global benchmark, may range from 2,800 ringgit ($916) a metric ton to 3,100 ringgit in the first half of 2013, said Franki Anthony Dass, executive vice president at Sime Darby Plantations Sdn., a unit of the world’s biggest listed producer. The commodity may trade between 2,400 ringgit and 2,700 ringgit until the end of this year as demand recovers before the festival season in India, Dass said Oct. 19.
Palm oil, used in foods and biofuels, fell to a three-year low this month as economic slowdowns in China and the European Union curbed demand, pushing reserves in Malaysia to the highest ever. The biggest producer after Indonesia announced on Oct. 12 a plan to cut the tax on crude exports and abolish a duty-free shipment quota from Jan. 1 to help liquidate the inventories.
The tax cut will “give companies the opportunity to move the surplus stock out of the country,” Dass said in an interview at his office in Subang Jaya, outside Kuala Lumpur. “That should reduce the stock and help the price move up.”
Reserves of crude palm oil gained to 2.48 million tons last month, according to Malaysian Palm Oil Board data. That was the third monthly climb, and 46 percent above the level in June. Stockpiles may reach or exceed 3 million tons on Jan. 1, Dorab Mistry, director at Godrej International Ltd., said on Oct. 16.
Futures plunged to 2,230 ringgit on the Malaysia Derivatives Exchange in Kuala Lumpur on Oct. 3, the lowest level since November 2009, and are set for a second annual drop. The January-delivery contract climbed 2.5 percent to 2,564 ringgit at 5:16 p.m. in Kuala Lumpur, showing a loss of 11 percent for the most active contract in the past year.
Some of the inventories may be depleted when India restocks before the Diwali festival on Nov. 13, and as biodiesel demand rises in Europe as the winter months approach, said Dass, who’s been in the industry for 30 years. Less production expected in the first quarter would also boost prices, he said. Output is typically at the lowest level in January and February.
The slowdowns in Europe and China, the biggest cooking-oil consumer, have failed to cut demand for food, including palm oil-based products, and prices will lure buyers, he said.
‘Don’t Stop Eating’
“In China, the economy can slow down, but the Chinese don’t stop eating,” Dass said. “The demand for food will always be there and China will pick up again. The economic slowdown for China is only disrupting the pricing.”
Malaysia’s move to cut export taxes will benefit producers with refineries and help them compete with supplies from Indonesia, Dass said. “The move by the government is positive to reduce the stocks, and makes the feedstock price competitive and improves our refinery margins,” he said.
The new rates will range from 4.5 percent to 8.5 percent, rising as prices climb from 2,250 ringgit to 3,600 ringgit, Plantation Industries and Commodities Minister Bernard Dompok said on Oct. 12. The existing levy is 23 percent. Indonesia last year cut export taxes to make local crude palm oil, or CPO, cheaper than in Malaysia, cutting costs for refiners.
Sime Darby, which produces about 2 million tons of sustainable and traceable palm oil, plans to raise crude output about 10 percent in the year to June 30, said Dass. Production may gain to 2.72 million tons from last year’s 2.45 million tons, with most of the growth in Indonesia, he said.
The diversified group, which also builds townships and houses, operates power plants and retails cars, is using better fertilizers and mechanizing farming to boost yields, said Dass.
“Sime Darby’s long-term growth is still intact but because of the lower CPO price year-on-year and also slower demand in the industrial division, we’re going to see flattish earnings for” fiscal 2012-2013, Alan Lim Seong Chun, an analyst at Kenanga Investment Bank Bhd., said from Kuala Lumpur today. Demand would ease due to the slowing global economy, Lim said.
Sime Darby owns a total of 878,797 hectares (2.17 million acres) of land in Malaysia, Indonesia and Liberia and about 60 percent of the area is planted with oil palms, according to the company. The land includes 220,000 hectares in the African country as part of a concession to plant oil palm and rubber.
“We’ll continue to look at opportunities to expand both in Indonesia and Africa and these will definitely be our main target areas for oil palm,” said Dass.
Sime Darby was little changed at 9.80 ringgit. The stock has advanced 6.5 percent this year as the benchmark FTSE Bursa Malaysia KLCI Index rose 8.6 percent.