Palm, the world’s most used cooking oil, is set to extend a bull market rally as output drops in Indonesia and biofuel mandates expand globally, said Dorab Mistry, director at Godrej International Ltd.
Futures will trade from 2,600 ringgit ($807) to 2,900 ringgit a metric ton between now and March, Mistry said in comments prepared for a conference in Bandung, Indonesia. Prices may rally further to 3,000 ringgit if Brazil implements a higher biodiesel mandate, which would bolster soybean oil prices, he said. That level may not be sustained as export taxes will further increase costs, he said.
“I expect prices to do the job of moving demand away from palm oil at least until March,” said Mistry, who has traded vegetable oils for more than three decades. “Stocks may begin to replenish from May 2014 and prices may decline thereafter.”
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 drops at plantations in Indonesia and biodiesel demand increases. Indonesian output will decline by 500,000 tons to 27.5 million tons this year, before rebounding to 30.5 million tons in 2014, said Mistry. That would be the first drop since 1998, according to data from the U.S. Department of Agriculture.
Futures closed little changed at 2,654 ringgit on Bursa Malaysia Derivatives in Kuala Lumpur today. Prices surged to 2,692 ringgit on Nov. 22, the highest since September 2012, and are 8.9 percent higher this year.
Indonesian output will fall 1.9 percent to 26.5 million tons this year after heavy rains and drought, according to the median of five grower estimates compiled by Bloomberg. That compares with 28.5 million tons estimated by the USDA. Deutsche Bank AG says futures traded in Malaysia, a global benchmark, will average 2,800 ringgit next year.
Plantations in Indonesia are taking longer than usual to recover from the high output cycle in the last four months of 2012, lowering crop this quarter, said Mistry. “The new high cycle in most parts of Indonesia will kick in from about May.”
Malaysian output may gain to 19.5 million tons to 19.7 million tons in 2014 from 19.2 million tons this year, said Mistry. The world’s second-largest grower produced 18.8 million tons last year, according to the nation’s palm oil board.
Vegetable oil supplies may remain tight until May, keeping prices higher, said Mistry. Additional supplies from the second half of 2013-2014 oil year will help ease prices, he said.
Mistry said on Nov. 14 in Guangzhou that futures could range between 2,400 ringgit and 2,600 ringgit with a surge to 2,800 ringgit in the first two months of next year, abandoning a Sept. 22 prediction for prices to 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.
Global biofuel demand may expand by at least 2.5 million tons on larger mandates in Indonesia and to a smaller extent in Malaysia, said Mistry. While Brazil and Argentina will also increase their mandates, rising palm and vegetable oil costs and declining crude prices have made discretionary blending unworkable, he said.
Indonesia 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. 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 will probably increase by 6 million tons in the 12 months from October, while supplies are set to expand 7.1 million tons, said Mistry.
Cash prices for soybean oil from the old crop will trade from $920 to $1,000 a ton on a free-on-board basis in Argentina, he said. Prices could rise to $1,100 if Brazilian and Argentinian mandates are enhanced and if the U.S. blenders credit is renewed, he said.
Vegetable oil imports by India may climb 4.2 percent to 11.1 million tons in the oil year that began Nov. 1 from a year earlier, said Mistry. The biggest palm oil consumer may buy 8.3 million tons of the tropical oil, little changed from 2012-2013.
“I expect palm imports to stagnate because palm’s discount to soft oils is narrowing,” said Mistry. “Indian refiners also prefer to import unrefined soft oils where margins are much better.”