Palm oil will probably trade from 2,400 ringgit ($748) to 2,600 ringgit in coming months after output was less than expected and as producers expand biofuel use, said Dorab Mistry, director at Godrej International Ltd.
Futures may rise as much as 8.3 percent to 2,800 ringgit a metric ton on good biodiesel demand in Indonesia and poor output in January and February, Mistry said in comments prepared for a conference in China, abandoning a prediction prices may tumble to 2,000 ringgit by January. At 2,800 ringgit, demand would drop and prices would be set to decline in the second half, he said.
Palm oil, used in everything from candy to detergents, entered a bull market this month and is heading for its first annual gain in three years as production declines at plantations in Indonesia, the world’s biggest supplier. Yields in the country may drop 15 percent to 20 percent this year on bad weather, the Indonesian Palm Oil Association said yesterday.
“The path of least resistance will be sideways to slightly higher,” said Mistry, who has traded vegetable oils for more than three decades. “September production in Indonesia was well below expectation. We thought the peak production period had been delayed and expected much better production in October. These hopes were dashed.”
Futures fell 0.6 percent to 2,588 ringgit on Bursa Malaysia Derivatives in Kuala Lumpur today. Prices rose to 2,628 ringgit on Nov. 1, the highest close since September 2012 and 21 percent more than the 2,167 ringgit settlement on July 29, meeting the common definition of a bull market.
Mistry said on Sept. 22 in Mumbai that futures could drop to 2,000 ringgit in January on prospects for big soybean crops in Brazil and Argentina and if Brent crude oil fell below $100 a barrel. Brent traded at $107.67 today.
Crude palm oil output at Golden Agri-Resources Ltd., the second-biggest palm plantations operator, dropped 5 percent to 1.58 million tons in the first nine months because of the trees’ biological cycle, it said Nov. 12. Production at Wilmar International Ltd., the largest palm oil trader, fell 8 percent to 473,833 tons in the third quarter from a year earlier, the Singapore-based company said Nov. 7. Output is typically highest from July to October because of the growing cycle.
Indonesian plantations are on the cusp of a low-yield cycle and the country could produce less than 27 million tons this year, falling short of the 30 million tons to 31 million tons estimated initially, Standard Chartered Bank said in a note yesterday, citing industry reports.
“There does not appear to be any big climatic or weather factor involved and therefore, production which has been lost in 2013 will be made up in 2014,” said Mistry. “It is entirely likely that we shall have in Indonesia a high cycle, which started in September and which gathers momentum only toward May and gives us a peak in September to November.”
Futures could rally to 3,000 ringgit by January if Indonesian production this year is less than 2012, while if output expanded by 1 million tons “current prices will be fine and need not go higher,” said Mistry. There was not much concern over Malaysian output, which at best will be 19.1 million tons and at worst 19 million tons this year, he said.
Indonesia’s move to increase biofuels blending will be the key driver for demand, said Mistry. The country raised the blending rate for biodiesel in subsidized fuel to 10 percent in September from 7.5 percent and the mandate will be expanded to non-subsidized fuel and for industrial users next year.
Biodiesel capacity may jump to 8.8 million kiloliters by the end of 2015 from 5.6 million kiloliters this year, Paulus Tjakrawan, secretary general of the Indonesia Biofuel Producers Association, said yesterday.
“There can be no denying the fact that domestic mandates in Indonesia, Malaysia and Brazil are really the game changers,” said Mistry. A tender for supply of biodiesel for use by PT Pertamina gave the market a sense of the seriousness of the Indonesian government, he said.
Domestic mandates for biodiesel in Indonesia and Malaysia will work as long as palm prices remain competitive with Brent crude, he said. Between July and October, the spread between palm and gas oil was enough to create an additional monthly biodiesel demand of 100,000 tons to 150,000 tons, he said. All the world’s major crude oil traders have set up infrastructure to capitalize on such opportunities, he said.
About 6.34 million tons of palm oil will probably be processed into fuel this year, according to Hamburg-based industry researcher Oil World.
Global cooking oil demand may increase by 6 million tons in the 12 months from October, while supplies will expand 6.6 million tons, said Mistry. Demand for palm was strong in India and Europe, he said. A stable rupee and optimism in the economy have led to better buying from Indian importers to meet demand and to replenish inventories, he said.
“From being a faded star, India has emerged in the last few weeks as a stellar importer once again,” said Mistry. “Palm shipments to Europe have also been brisk and way ahead of the previous year.”
Imports by India probably climbed 14 percent in October to 710,000 tons from a month earlier as a delay in the local oilseed harvest reduced cooking oil stockpiles to the lowest level in nine months, a Bloomberg survey showed this week.
Soybean oil from the old crop will trade from $920 to $950 a ton on a free-on-board basis in Argentina, he said.