Palm oil will rebound from a five-year low as demand improves and record supplies of soybeans, which can be crushed to make an alternative oil, are absorbed, according to Sime Darby Bhd., the biggest listed producer by market value. Futures advanced.
“Prices should bounce back by October, November,” Franki Anthony Dass, executive vice president of the Petaling Jaya, Malaysia-based company’s plantation division, said in an interview. “The bumper soybean crop will quickly drop,” said Dass, who’s been in the industry for more than 30 years.
Palm slumped into a bear market in July on swelling global supplies of edible oils, including a record soybean harvest in the U.S. Futures also dropped as demand for biofuels missed expectations and as forecasters reduced odds for the onset of an El Nino, which can disrupt supplies from Indonesia and Malaysia, the biggest producers. Standard Chartered Plc and CIMB Investment Bank Bhd. are among forecasters seeing a rebound in the oil, which is used in foods, cosmetics and fuels.
“For food and non-food usage, the versatility is for palm oil, so the demand will come back,” Dass said on Aug. 29, without giving a price forecast. The “good thing is that imports from China are growing, while India has stagnated. That is worrying. India and Pakistan must buy,” he said.
Futures on the Bursa Malaysia Derivatives, the global benchmark, fell to 1,914 ringgit ($604) a metric ton today, the lowest since March 2009, before rebounding as much as 1.2 percent to 1,952 ringgit. The contract for November was up 0.2 percent at 1,933 ringgit at 3:31 p.m. in Kuala Lumpur.
While the decline below 2,000 ringgit was unexpected and “worrying,” Sime’s average cost of production in Malaysia and Indonesia is about 1,400 ringgit a ton, according to Dass. “If the CPO price is at 2,000, we still make money,” he said, using the initials for crude palm oil.
Prices risk tumbling further to approach the cost of production, according to Dorab Mistry, director at Godrej International Ltd. Private-sector estates in Malaysia and Indonesia have costs of about 1,500 ringgit to 1,600 ringgit a ton, Mistry said in e-mailed comments to Bloomberg News.
Stockpiles in Malaysia may climb to 2 million tons as nationwide production rises in the peak-output months, said Dass, without giving a timeframe. Reserves stood at 1.68 million tons in July, according to data from the Malaysian Palm Oil Board. They last reached more than 2 million tons in March 2013.
Sime’s output of fresh-fruit bunches, from which the oil is crushed, will climb 10 percent to 15 percent this quarter from 2.47 million tons in the same period a year earlier, said Dass. Output in the year to June 30, may rise 3 percent to 5 percent, he said. That compares with a 7 percent drop in 2013-2014.
“What’s important is that we’re still seeing higher production and higher inventory,” said David Ng, a Kuala Lumpur-based derivatives specialist at Phillip Futures Sdn. “As long as we see this, prices have limited upside. Buyers are also waiting on the sidelines to see when they can get a bargain.”
Palm oil may trade in a range from 1,900 ringgit to 2,200 ringgit through to the end of the year, Mohd Bakke Salleh, Sime’s chief executive officer, told reporters on Aug. 29. Each 100 ringgit drop in the price, “translates into depriving ourselves of 250 million ringgit profit,” said Mohd Bakke.
Palm may rally to as much as 2,400 ringgit late in the fourth quarter as users rebuild reserves and biofuel demand rises, Ivy Ng, an analyst at CIMB, said in an Aug. 24 report. Prices may improve in the fourth quarter as inventories tighten, according to Abah Ofon, an analyst at Standard Chartered.
Soybean production in the U.S., the world’s top grower, will reach a record 3.816 billion bushels this year, the U.S. Department of Agriculture forecast on Aug. 12. World inventories before the start of the 2015 Northern Hemisphere harvests will rise to 85.62 million tons, the highest ever, the USDA said.
Soybeans fell to $10.1975 a bushel on Aug. 26, the lowest since September 2010, while soybean oil slumped to 31.96 cents a pound today, the lowest since March 2009. Soybean oil’s premium over palm was at $104.25 a ton today, below last year’s average of about $244, data compiled by Bloomberg show. The premium was below $100 for most of July and August.
With “the soybean bumper crop in the U.S., you see the discount between soybean oil and palm oil is below $100, so it doesn’t make palm oil that attractive,” said Dass. Still, soybeans are “not a perennial crop, so palm oil will always have the advantage,” he said.