Palm Oil Prices Expected to Plunge Due to Oversupply

KUALA LUMPUR ~ Palm oil prices could fall by 46 percent next year due to oversupply and waning demand for biofuels, despite measures to cut production in Southeast Asia, a brokerage group has said.

CLSA Asia-Pacific Markets has slashed its forecast for palm oil prices by 46 percent in 2009 and 32 percent in 2010, from current levels of about 1,455 ringgit (US$405) per ton.

In a report released last week, the brokerage said it expects the commodity to trade at 1,000 ringgit ($278) per ton next year and 1,250 ringgit in 2010.

Prices of palm oil have plummeted by 68 percent since a March high of 4,486 ringgit per ton due to the financial crisis and the falling price of crude oil – which reduces demand for palm oil to supply the biodiesel industry.

Malaysia’s palm oil inventory in October hit a record 2.1 million tons – a 14-percent increase from the previous year – due to a production surge and a slowdown in exports to China and the Netherlands.

CLSA said that the inventory build-up is much worse in Indonesia.

“The biofuels story is waning, providing less demand support. We are also sceptical about effectiveness of government initiatives to boost CPO (crude palm oil) prices,” it said.

Malaysia and Indonesia, which account for 85 percent of global palm oil output, plan to replant old trees and mandate biodiesel use to cut supply and bolster prices.

However, Buddhika Piyasena from Fitch Ratings was less gloomy, saying that prices had “pretty much bottomed out” at current levels and that the risk of further losses was limited.

“We might see these levels continue in the $450 per ton range for a while,” Piyasena said, noting that both the world’s top producers, Indonesia and Malaysia, are implementing measures to push up prices.

Deputy commodities minister Kohilan Pillay said Malaysia aims to fell some 200,000 hectares of old palm oil trees and all government vehicles will start using biofuel in the next few months.

The replanting scheme will involve trees of more than 25 years old as the yield from these trees is low at about 17 tons per hectare annually.

Smallholders will be given a 1,000 ringgit incentive by the government for each hectare replanted.

“A good price for CPO is at the 2,000 ringgit range and this is what we are aiming for,” he said.

Fitch’s Piyasena said that if the measures to mandate the use of biofuel in both countries are fully implemented, it could absorb up to 1 million tons of palm oil.

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