Palm oil faces bearish Q4 on high stocks, slow demand

MUMBAI (Reuters) - Palm oil prices will fall further this year as slowing economic growth reins in demand for biofuel production, leading to higher stocks at top producers Indonesia and Malaysia, an industry meeting concluded on Sunday.

Any support from India, the world's largest importer of cooking oils, will be curbed in the last quarter as its own farmers start marketing product from the summer harvest.

"Stockpile is building in Indonesia and Malaysia, but there are few buyers right now. Offtake from the biofuel industry is very thin despite offering a big discount over soyoil," said Dinesh Shahra, managing director of Ruchi Soya (RCSY.NS), India's top soymeal exporter.

Palm oil stocks in Malaysia could rise to 3 million tonnes at the start of next year from early September levels around 2.1 million tonnes, according to Dorab Mistry, head of edible oil trading with Indian conglomerate Godrej Industries (GODI.NS) and a leading expert on the industry.

Indonesia and Malaysia's combined palm oil stocks could total 4.5 million tonnes by the end of 2012, Shahra added.

With stocks high and production climbing, the pressure will stay on prices, delegates said, with Malaysian crude palm oil (CPO) potentially falling as low as 2,500 ringgit per tonne in the last quarter from around 2,760 ringgit now.

Mistry said there was a 50 percent chance CPO futures prices could even drop to 2,300 ringgit in the last quarter as Indonesia makes tax changes to grab market share from Malaysia, which has been pushing tax-free shipments to India.

Falls in crude oil prices could exacerbate the situation as that makes biofuels less attractive as an alternative.

"I am bearish on crude oil prices. They should come down. Demand is slowing due to a slowdown in the global economy," James Fry, chairman of commodities consultancy LMC International, said.

CPO prices could even fall to 2,285 ringgits in the fourth quarter, he said, if Brent crude drops as low as $80 per barrel from current levels around $111.


Meanwhile, as the major producers continue their drive to reduce stocks, the hefty discount of palm oil to soyoil is likely to continue, delegates said.

"The palm oil discount is big and will probably stay big to avoid burdensome stock building," said Stefan Gierga, managing director at Bunge Handels GmbH trading company.

That differential could cut India's soyoil imports in the marketing year from November 1, 2012 from about 1 million tonnes in the current year, according to Atur Chaturvedi, chief executive of Adani Wilmar, a leading India-based edible oil importer.

But even so, delegates felt India's total cooking oil imports may hit a record around 10 million tonnes in 2012/13 as its bulging population -- adding about 19 million people a year -- along with an increasingly wealthy middle class raise demand.

Soyoil prices themselves could start to wilt as soybean output in South America rebounds after a severe drought last year and the crushing season gets underway in the United States -- with China snapping up the output to make its own soyoil.

"China is aggressively buying new soybean crop of the United States. It is unlikely to raise edible oil imports significantly in the next three months as it will get oil from crushing of soybean," said a dealer with a global commodity trading firm.

Shahra cautioned that things could change if South America's crop was hit by adverse weather.

"I am expecting prices to correct based on stocks. But you don't know what is in the mind of the weather god. If the weather becomes unfavourable for the soybean crop in South America, like last year, then everything will change. Then prices will rise to record high level," he said.

And it is also possible that the deep discount could favour palm oil and push demand higher, said Thomas Mielke, editor of Hamburg-based Oil World.

"Palm oil is offered at discounts of more than $250 (per tonne) under soybean oil. I think this is not sustainable. We are going to see world import demand to shift to the more effectively priced palm oil," he said in his presentation.

(Editing by David Cowell)

Updated Date: Sep 23, 2012 20:45 PM

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