Palm oil will probably tumble into a bear market next year as monthly output in Malaysia and Indonesia surges to records, compounding the impact of the biggest ever stockpiles, according to Godrej International Ltd.
Prices will drop below 2,200 ringgit ($723) a metric ton in August or earlier after trading between 2,300 ringgit and 2,600 ringgit between now and February, Dorab Mistry, director at Godrej, told a conference, giving his first outlook for 2013. The most-active contract closed at 2,370 ringgit on the Malaysia Derivatives Exchange today, after touching a three-year low of 2,220 ringgit on Nov. 12.
Palm oil, used in everything from biofuels to noodles, fell 25 percent this year, extending a loss from 2011, as slowdowns in China and the European Union cut demand and boosted stockpiles. Mistry’s forecast raises the prospect that prices may drop for three straight years in what would be the worst run of losses since at least 1996, according to data compiled by Bloomberg.
“I expect vegetable oil prices to remain range-bound in the first half of the year and to begin a major bear market in the second half,” Mistry said in Bali, Indonesia. “How low they will go is very difficult to predict at this stage.”
The outlook from Godrej contrasts with a forecast this week from Rabobank International, the world’s biggest agricultural lender, that picked palm oil to be the best-performing agricultural commodity in 2013. Prices will rise as inventories decline from record levels and demand increases from importers including China and India, the Amsterdam-based bank said in a report on Nov. 28.
Falling prices may contribute to lower global food costs in 2013, while paring profits and revenues at producers including Sime Darby Bhd. and Golden Agri-Resources Ltd. Palm oil may trade between 2,500 ringgit and 3,000 ringgit for the next six months, supported by lower production in the first quarter of the next year and higher demand, Sime Chief Executive Officer Mohd Bakke Salleh said Nov. 27.
Output in Indonesia and Malaysia, which account for 87 percent of global production, may reach monthly records between September to December next year if weather remains normal, said Mistry. Malaysia may produce a record 19 million tons in 2013, while Indonesian output may reach as much as 30 million tons, an all-time high, he said. Production is forecast at 18.4 million tons and more than 27.5 million tons this year, he said.
Futures dropped 5 percent in November, a third monthly loss. Mistry didn’t define what he meant by a bear market. A bear market is typically defined as a decline of 20 percent or more from a closing high and is compared with a closing low.
Prices may have bottomed out as stockpiles are set to decline amid a pick-up in demand from buyers including India, Thomas Mielke, executive director of Oil World, told the conference. Futures may rebound to 3,100 ringgit to 3,200 ringgit between March and May, he said.
“Prices will strengthen quite a bit more than 2,600 ringgit as we’re in this inventory downcycle, which follows production,” Alvin Tai, an analyst at OSK Investment Bank Bhd., said by phone in Kuala Lumpur. Inventory in Malaysia may fall to about 1.6 million tons by May, he said.
Global food use of vegetable oils may grow by about 3.5 million tons as lower prices stimulate consumption, while biodiesel usage will expand 500,000 tons in the year that began on Oct. 1, said Mistry, who’s worked in the industry for 35 years. The increase in demand of 4 million tons will exceed incremental supply of 3.15 million tons, he said.
The new season is starting with the “heaviest stocks in history” and this overhang will cushion the impact of the lower production of vegetable oils in the first half, said Mistry. Malaysia’s reserves climbed to a record of 2.51 million tons in October, according to the nation’s palm oil board. Stockpiles in Indonesia may be more than 4 million tons, Mistry said.
India, the biggest buyer of palm oil, started its new oil year with record inventories of 1.65 million tons, said Mistry. Domestic cooking oil output should expand this year due to a bigger mustard crop, he said. That may prompt the government to impose a 10 percent duty on crude palm oil imports and more than double taxes on refined oils to 20 percent, he said.
“I am bearish on the soya complex post-May with a gradual erosion of risk premium from as early as February,” he said. “Old crop soya oil needs to control demand and will therefore remain at a big premium to palm.”
Soybean oil futures in Chicago may trade in a range of 48 cents and 53 cents a pound, while the new soybean oil crop from May onwards should see prices between $900 and $1,020 a ton on a free-on-board basis in Argentina, he said. Soybean oil for delivery in January traded at 49.92 cents today. Soybeans are crushed to make an oil that competes with palm oil.
Global economic growth is expected to be better in 2013, compared with this year, with the U.S. avoiding or resolving the so-called fiscal cliff, leading to a stronger dollar and gains for equities in most markets, said Mistry.
“The end of the cyclical bull market in commodities leads me to believe that profitability in agriculture and in plantations will soon revert to more normal levels,” he said. “The days of super-normal profits in palm oil cultivation are coming to a close.”