Global economic gloom to weigh on palm oil

MUMBAI: A brewing economic crisis in the developed world will weigh on palm oil prices that have lost 21 per cent this year on high output, although the market could rally again on Asian demand and erratic weather, industry analysts said.

Investor concerns that eurozone and US debt crisis may develop into a full-blown recession and slow commodity demand will be a key driver for palm oil this year, analysts at an industry meeting here said.

"The delicate economic situation in the developed world leads me to believe there will be several short periods between now and the middle of 2012 when markets will be extremely volatile," Dorab Mistry, a leading analyst, said yesterday.

"Given all that, I do not believe markets have bottomed out yet," said Mistry, who is also the head of vegetable oil trading with India's Godrej at the end of the three-day Globoil conference.

Mistry said palm oil will fall from current RM2,990 levels to trade in a range of RM2,800 to RM3,100 until mid-November, due partly to the hot US weather market concerns on soya coming to an end.

His views were echoed by Thomas Mielke, head of Hamburg-based research house Oil World, who said palm oil futures could fall in the next three months to RM2,850 on the brewing financial crisis and strong output.

Palm oil production in Indonesia and Malaysia, which accounts for 90 per cent of the world's supply, has been strong after two years of erratic weather and higher maturing acreage.

But a possible resurgence in the La Nina weather phenomenon could hurt output and drive prices to RM4,000 levels by the second quarter of next year, Mistry said.

La Nina triggers heavy rains that can stall harvesting rounds in top producers Indonesia and Malaysia. Six months down the line, output usually gets cut due to poor pollination affecting palm fruit development.

Mielke pointed to vegetable oil prices rising again in the first half of next year as bio fuel mandates in Argentina, Brazil and the US swallow up more vegetable oil supplies at a time when palm oil output slows from a bumper 2011.

"We have to understand soyabean oil supplies are going to trim in 2012, 2013 due to ambitious bio diesel programmes," he said, adding about 22 million tonnes of vegetable oils globally were used for biofuel.

Analysts and traders are counting on demand from developing economies led by India and China - the world largest edible oil buyers with their billion plus populations to support prices of palm oil.

"Demand is rising in India and consumption growth would be there in coming years," said Dinesh Shahra, managing director, Ruchi Soya Industries , India's biggest edible oil importer.

"Disposable income is rising. We need to import more edible oils in 2011/12 despite having good domestic oilseeds crop," he added.

At the conference, industry forecasts of Indian edible oil imports in the new marketing year from Nov. 2011 ranged between 8.5 million and 9.2 million tonnes, after orders fell for the first time in five years in the current year.

India could face a shortage in imported edible oils as its top supplier Indonesia has slashed its export taxes in favour of refined palm oils but does not have the refining capacity to meet India's monthly demand of 600,000 tonnes. But the South Asian nation has started buying more refined palm oils, raising fears domestic processors will lose a large chunk of their business.

Food Minister K.V. Thomas, who has been the most vocal about the tax move, offered no cues when he attended the conference as whether the government will raise the import tariff values for refined palm oils.

"I suppose these things take time," said an Indian trader who took part in the conference. - Reuters

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