The Star Online > Business
By OOI KOK HWA
Wednesday October 22, 2008
Great Depression versus now
As much as there are similarities between the two crises, the damage caused by the current turmoil is likely to be less severe given the swift actions of central banks.
AS a result of the recent financial tsunami, some experts have started to ponder whether we are headed for a depression.
The current credit crunch and the meltdown in some financial institutions were quite similar to what happened during the Great Depression in the 1930s.
In this article we will analyse the reasons behind the 1929 Wall St crash, which kickstarted the Great Depression and compare it to the current situation to identify any signs that a depression is approaching.
Milton Friedman, the leading advocate of monetarism, argued that every great depression had been accompanied or preceded by a monetary collapse.
According to Ben Bernanke, the US Fed chairman, the main reason behind the Great Crash of 1929 was due to the tight monetary policies adopted during that period.
He said the high interest rates back then caused the US economy to fall into a recession that led to the great market crash in October 1929.
As the US dollar was backed by gold, the acute selling of dollars for gold resulted in a run on the dollar.
The Fed continued to increase interest rates in an effort to preserve the value of US dollar.
As a result, high interest rates caused bankruptcies for many companies.
At the peak of the Great Depression, the US unemployment rate hit 25%
To rub salt into the wound, massive withdrawals of cash by panicky depositors were the last straw that brought about the total collapse of financial institutions.
In that period, bank deposits were uninsured and the collapse of the banks caused depositors to lose their savings.
And due to the economic uncertainties, the surviving banks were reluctant to give out new loans.
Another culprit in the 1929 crash was margin financing which caused excessive speculation in the stock market.
Investors needed only to put up 10% capital and borrow the rest from the bank to invest in the stock market.
The collapse of stock prices led to margin calls and further selldowns.
Coming back to the 2008 crash, the banking and credit-market crisis was mainly due to the property boom and subprime bust.
The collapse of subprime loans sparked the credit crunch, which dragged some financial institutions into trouble.
As a result of the securitisation and the creation of innovative financial products like collateralised-debt obligations and credit-default swaps, the collapse of one financial institution had a domino effect, leading to the collapse of other financial institutions.
Now, the pertinent question is whether we are in a long bear market and heading for a depression.
We believe a depression like the one in 1929 may not happen exactly the way it did before.
Given the fast actions taken by central banks around the world, the damage caused by this crisis will be less severe than the one in 1929.
Central banks around the world have been putting in concerted efforts to make sure the global economy will not fall into a depression.
The rescue packages being implemented throughout the world will help stabilise the financial system.
We believe the reduction of interest rates and the increase in money supply will help cushion the impact of the credit crunch.
Besides, deposits placed with most financial institutions are guaranteed by central banks.
Even though the US unemployment rate may rise to 10% from 6.1% currently, it is still far below the peak of 25% hit during the Great Depression.
In the 1929 crash, the Dow Jones Industrial Average took about three years to reach bottom in July 1932 from its peak in September 1929.
From the peak to the trough the Dow lost about 90%.
The Great Depression in the US started in August 1929 and ended only in March 1933.
The stock market started to recover eight months before the US economy ended its depression.
At present, the Dow has already dropped for a year from its peak in October 2007, currently down about 37.5% against its peak of 14,164 points on Oct 9, 2007.
In view of the possible economic recession in most developed countries, we think the Dow will drop further from current levels.
Nevertheless, we believe it will recover much faster and the magnitude of the fall will be far less severe than the one in 1929.
Lastly, we believe the stock market will eventually recover.
At this point, to be more prudent, we may take a “wait and see” approach until things stabilise.
> Ooi Kok Hwa is an investment adviser licensed by Securities Commission and the managing partner of MRR Consulting
Wednesday, October 22, 2008
Sunday, October 19, 2008
Time To Invest In Bond
The Star Online > Bizweek Saturday October 4, 2008
Malaysian Bond Market
DURING this holiday-shortened week in Malaysia, much has happened in the western countries. In the US, a revised US$700bil rescue package incorporating increase in bank-deposit-insurance limits and tax breaks has been approved by the Senate, and is scheduled to be re-voted by the House of Representatives. Despite the increased possibility of this rescue package being passed, the credit market is getting increasingly jittery. Banks are hesitant to lend to each other, causing spikes in interbank rates which threaten to bring the credit market to a halt.
Warren Buffett summed it up aptly with his statement: “In my adult lifetime I don’t think I’ve ever seen people as fearful, economically, as they are right now ... they are not wrong to be worried.”
With the significant stress in the global credit markets, and the rapidly deteriorating global economic conditions, the Malaysian economy will not be insulated from the turmoil. Falling manufacturing and commodity exports, coupled with slowing domestic consumption due to poor sentiment, mean that we are likely to go through a rough patch in the coming quarters.
In this environment where almost every asset class is falling in value, local bonds especially MGS and high-grade PDS stand out as defensive investments for investors. Cooling inflationary pressure and growing possibility of rate cuts by global central banks mean that not only is unlikely to be raised, but there may be room for rate-cuts going forward. The lack of investment alternatives and improving interest rate outlook provide the upsides for local bonds.
The recent concern of oversupply of MGS following the Government’s revised fiscal deficit target is mitigated by the shrinking PDS issuance pipeline.
Meanwhile, there is still a deep pool of liquidity to underpin the demand for local bonds, with close to RM300bil of excess liquidity in the banking system, and steadily growing pension funds, thanks to our high saving rates. The need to generate real investment return amid the current negative real interest-rate environment should support the buying interest and cap any major downsides of local bonds.
While interest rate and demand & supply conditions bode well for local bonds, the same cannot be said about credit outlook. The impending economic weakness will lead to lower corporate profitability and heightened financial risks €“ two major recipes for higher credit risks. Therefore other than MGS and sovereign-related or supranational credits, investors still need to be very selective on credits in general.
Trading volume is subdued during the week as most market players are away. Nevertheless, the MGS market remains bullish with most benchmark bonds closing 8-10 bps lower. The 3-year benchmark MGS’9/11 contributed bulk of the trades and dipped 10 bps lower to 3.87%, while the 10- and 20-year benchmarks fell 8 and 10 bps to 4.57% and 5.05% respectively. The 5-year benchmark was not traded.
Trading was light in the PDS market, with the bulk of the trades coming from the AAA segment, largely on sovereign-related and supranational credits. Nevertheless, with strong buying interest pushing down MGS and IRS yield curves considerably, credit spreads are now approaching their 5-year highs, raising the prospect of buying interest spilling over to this segment.
MYR Interest Rate Swap
During the week, MYIRS saw better receiving interest on the back of the bullish bond market. As we write, the curve dipped 5-15 bps on week-on-week basis albeit in thin trading. Bullishness in the US bond market on economic concern and expectation of rate cuts supported the local receiving theme as well. We expect to see some volatile movements in MYIRS, tracking bond performance closely in the coming weeks.
US Treasury Market
US Treasuries performed strongly throughout the week as the market was plagued by uncertainties on the US$700bil rescue package. As increasingly the effectiveness of the rescue package is questioned, expectation of rate hikes by the Fed is gaining steam.
The UST yield curve bullish steepened during the week. As at market close on Thursday, yields on the 2 and 5-years UST dropped 48 and 39 bps from last Friday to 1.62% and 2.67% respectively, while the 10 and 30-year UST closed 23 bps and 22 bps lower at 3.63% and 4.15% respectively.
Foreign Exchange Market
Forex movements of late have been largely affected by risk aversion and the US rescue package. During the week, the USD surged against the major currencies on expectation of the approval of the rescue package. We expect more market volatility ahead as nations ponder measures to stabilise the global financial markets.
European currencies fell against the greenback amid growing signs of economic slowdown in Europe. With prospect of recession in the Eurozone and the UK, the outlook for EUR and GBP has turned bearish. We expect a lower trading band of 1.36-1.41 for EUR/USD and 1.74€“1.80 for GBP/USD in the coming weeks.
Yen is firm as risk aversion continues to be the dominant theme. Given the prevailing negative sentiment, USD/JPY is expected to be range-bound within 102€“107 with downside bias.
USD/MYR touched a high of 3.4750 on broad USD strength and the bid tone in the pair will likely persist amid the global financial turmoil. We expect a trading range of 3.4400€“3.4800 in the following week.
Global Economy
Economic data released in the US were largely negative last week. Consumer spending in the US was stagnant in Aug-08, despite a 0.5% m/m gain in personal income as higher income was mainly driven by unemployment insurance and social benefits. In Sept-08, ADP report showed employers cut 8,000 payrolls while Challenger reported a 32.6% y/y increase in job cuts.
Manufacturing activities contracted by the most since 2001 in Sept-08 amid weakened overseas demand. Factory orders fell 4.0% m/m in Aug-08, the most in 2 years. Meanwhile, the housing slump is showing no sign of bottoming, as house prices continued to fall in July-08 by 16-18% y/y.
In Europe, the ECB kept its benchmark interest rate unchanged at 4.25% but signalled the possibility of rate cuts going forward as both growth and inflation were dampened by the credit turmoil.
More pessimistic data were also seen in Asia. In Japan, the Tankan Index showed that large manufacturers turned pessimistic for the first time in 5 years in 3Q08. Japan’s jobless rate rose to a 2-year high of 4.2% in Aug-08. Elsewhere, India and Thailand reported slowing export growth.
CPI readings continued to show cooling price pressures in Asia. In Sept-08, CPI in South Korea and Thailand slowed to 5.1% y/y and 6.0% y/y, from 5.6% and 6.4% a month earlier. Nevertheless, food-price inflation in Thailand was still on an upward trend, increasing 15.7% y/y in Sept-08 vs 14.3% in Aug-08.
For enquiries, please contact:
Ng-juan-hui@ambg.com.my
Melissa-yong@ambg.com.my
Ooi-liang-wu@ambg.com.my
ฉ 1995-2008 Star Publications (Malaysia) Bhd (Co No 10894-D)
Malaysian Bond Market
DURING this holiday-shortened week in Malaysia, much has happened in the western countries. In the US, a revised US$700bil rescue package incorporating increase in bank-deposit-insurance limits and tax breaks has been approved by the Senate, and is scheduled to be re-voted by the House of Representatives. Despite the increased possibility of this rescue package being passed, the credit market is getting increasingly jittery. Banks are hesitant to lend to each other, causing spikes in interbank rates which threaten to bring the credit market to a halt.
Warren Buffett summed it up aptly with his statement: “In my adult lifetime I don’t think I’ve ever seen people as fearful, economically, as they are right now ... they are not wrong to be worried.”
With the significant stress in the global credit markets, and the rapidly deteriorating global economic conditions, the Malaysian economy will not be insulated from the turmoil. Falling manufacturing and commodity exports, coupled with slowing domestic consumption due to poor sentiment, mean that we are likely to go through a rough patch in the coming quarters.
In this environment where almost every asset class is falling in value, local bonds especially MGS and high-grade PDS stand out as defensive investments for investors. Cooling inflationary pressure and growing possibility of rate cuts by global central banks mean that not only is unlikely to be raised, but there may be room for rate-cuts going forward. The lack of investment alternatives and improving interest rate outlook provide the upsides for local bonds.
The recent concern of oversupply of MGS following the Government’s revised fiscal deficit target is mitigated by the shrinking PDS issuance pipeline.
Meanwhile, there is still a deep pool of liquidity to underpin the demand for local bonds, with close to RM300bil of excess liquidity in the banking system, and steadily growing pension funds, thanks to our high saving rates. The need to generate real investment return amid the current negative real interest-rate environment should support the buying interest and cap any major downsides of local bonds.
While interest rate and demand & supply conditions bode well for local bonds, the same cannot be said about credit outlook. The impending economic weakness will lead to lower corporate profitability and heightened financial risks €“ two major recipes for higher credit risks. Therefore other than MGS and sovereign-related or supranational credits, investors still need to be very selective on credits in general.
Trading volume is subdued during the week as most market players are away. Nevertheless, the MGS market remains bullish with most benchmark bonds closing 8-10 bps lower. The 3-year benchmark MGS’9/11 contributed bulk of the trades and dipped 10 bps lower to 3.87%, while the 10- and 20-year benchmarks fell 8 and 10 bps to 4.57% and 5.05% respectively. The 5-year benchmark was not traded.
Trading was light in the PDS market, with the bulk of the trades coming from the AAA segment, largely on sovereign-related and supranational credits. Nevertheless, with strong buying interest pushing down MGS and IRS yield curves considerably, credit spreads are now approaching their 5-year highs, raising the prospect of buying interest spilling over to this segment.
MYR Interest Rate Swap
During the week, MYIRS saw better receiving interest on the back of the bullish bond market. As we write, the curve dipped 5-15 bps on week-on-week basis albeit in thin trading. Bullishness in the US bond market on economic concern and expectation of rate cuts supported the local receiving theme as well. We expect to see some volatile movements in MYIRS, tracking bond performance closely in the coming weeks.
US Treasury Market
US Treasuries performed strongly throughout the week as the market was plagued by uncertainties on the US$700bil rescue package. As increasingly the effectiveness of the rescue package is questioned, expectation of rate hikes by the Fed is gaining steam.
The UST yield curve bullish steepened during the week. As at market close on Thursday, yields on the 2 and 5-years UST dropped 48 and 39 bps from last Friday to 1.62% and 2.67% respectively, while the 10 and 30-year UST closed 23 bps and 22 bps lower at 3.63% and 4.15% respectively.
Foreign Exchange Market
Forex movements of late have been largely affected by risk aversion and the US rescue package. During the week, the USD surged against the major currencies on expectation of the approval of the rescue package. We expect more market volatility ahead as nations ponder measures to stabilise the global financial markets.
European currencies fell against the greenback amid growing signs of economic slowdown in Europe. With prospect of recession in the Eurozone and the UK, the outlook for EUR and GBP has turned bearish. We expect a lower trading band of 1.36-1.41 for EUR/USD and 1.74€“1.80 for GBP/USD in the coming weeks.
Yen is firm as risk aversion continues to be the dominant theme. Given the prevailing negative sentiment, USD/JPY is expected to be range-bound within 102€“107 with downside bias.
USD/MYR touched a high of 3.4750 on broad USD strength and the bid tone in the pair will likely persist amid the global financial turmoil. We expect a trading range of 3.4400€“3.4800 in the following week.
Global Economy
Economic data released in the US were largely negative last week. Consumer spending in the US was stagnant in Aug-08, despite a 0.5% m/m gain in personal income as higher income was mainly driven by unemployment insurance and social benefits. In Sept-08, ADP report showed employers cut 8,000 payrolls while Challenger reported a 32.6% y/y increase in job cuts.
Manufacturing activities contracted by the most since 2001 in Sept-08 amid weakened overseas demand. Factory orders fell 4.0% m/m in Aug-08, the most in 2 years. Meanwhile, the housing slump is showing no sign of bottoming, as house prices continued to fall in July-08 by 16-18% y/y.
In Europe, the ECB kept its benchmark interest rate unchanged at 4.25% but signalled the possibility of rate cuts going forward as both growth and inflation were dampened by the credit turmoil.
More pessimistic data were also seen in Asia. In Japan, the Tankan Index showed that large manufacturers turned pessimistic for the first time in 5 years in 3Q08. Japan’s jobless rate rose to a 2-year high of 4.2% in Aug-08. Elsewhere, India and Thailand reported slowing export growth.
CPI readings continued to show cooling price pressures in Asia. In Sept-08, CPI in South Korea and Thailand slowed to 5.1% y/y and 6.0% y/y, from 5.6% and 6.4% a month earlier. Nevertheless, food-price inflation in Thailand was still on an upward trend, increasing 15.7% y/y in Sept-08 vs 14.3% in Aug-08.
For enquiries, please contact:
Ng-juan-hui@ambg.com.my
Melissa-yong@ambg.com.my
Ooi-liang-wu@ambg.com.my
ฉ 1995-2008 Star Publications (Malaysia) Bhd (Co No 10894-D)
Tuesday, October 7, 2008
There will be no new refineries. Oil Moving Up Soon?
There will be no new refineries by Giuseppe Marconi - 2008/07/23
Oil companies won't be building more refineries, because there won't be enough oil left to refine by the time new refineries could pay for themselves.
There hasn't been a new refinery built in the US since 1976. In 1982, there were 301 operable refineries in the U.S and they produced about 17.9 million barrels of oil per day. Today there are only 149 refineries, and they're producing 17.4 million barrels. This increase in efficiency is impressive but not a miracle. As with everything these outputs are carefully calculated to optimize profitability. Let me explain.
Truth be told, new refineries require tremendous financial commitments which take anywhere from 15 to 25 years to amortize. With record oil prices it would make perfect sense to invest in a few refineries today, except... for the lack of oil to be refined 20 years from now.Trends have predicted that peak oil production, where the production of oil starts to decline, will be reached around 2007-2010. After that, there will be less and less oil to refine no matter where drillers look. In this context, building expensive new refineries does not make a lot of sense as existing ones will be sufficient to process whatever little oil is left. So forget about new refineries, except for a few in the northern midwest to process the heavy oil from Canada.
Crude oil is a finite resource more and more depleted. As such, an increasing demand put on this finite supply necessitates careful management in order to stretch its lifespan and profitability.
Oil companies won't be building more refineries, because there won't be enough oil left to refine by the time new refineries could pay for themselves.
There hasn't been a new refinery built in the US since 1976. In 1982, there were 301 operable refineries in the U.S and they produced about 17.9 million barrels of oil per day. Today there are only 149 refineries, and they're producing 17.4 million barrels. This increase in efficiency is impressive but not a miracle. As with everything these outputs are carefully calculated to optimize profitability. Let me explain.
Truth be told, new refineries require tremendous financial commitments which take anywhere from 15 to 25 years to amortize. With record oil prices it would make perfect sense to invest in a few refineries today, except... for the lack of oil to be refined 20 years from now.Trends have predicted that peak oil production, where the production of oil starts to decline, will be reached around 2007-2010. After that, there will be less and less oil to refine no matter where drillers look. In this context, building expensive new refineries does not make a lot of sense as existing ones will be sufficient to process whatever little oil is left. So forget about new refineries, except for a few in the northern midwest to process the heavy oil from Canada.
Crude oil is a finite resource more and more depleted. As such, an increasing demand put on this finite supply necessitates careful management in order to stretch its lifespan and profitability.
Friday, October 3, 2008
CPO falls below key RM2,000 level
KUALA LUMPUR/SINGAPORE:
Ballooning vegetable oil stocks and fast-declining interest from funds in volatile commodities may hold off a recovery in palm oil prices until next year despite its fall to a level much lower than rival soyoil.
Palm oil's discount to soy oil has more than doubled to US$450 (RM1,553) a tonne in just six months as palm has lost half its value since hitting a historic high in March, triggering market talk that palm might have gone too low too soon and would bounce back.
But analysts said rising output in Malaysia and Indonesia and bumper crops in China and India would boost supplies and reduce export demand. And with a worsening financial crisis, funds are fleeing assets that have seen wide price swings recently.
"Panic has forced funds and investors to sell out palm oil," said Martin Bek-Nielson, executive director of United Plantations Bhd "Cash is now king in an environment when stocks are ballooning, exports are dwindling and the global economy is getting shattered."
Rising use of soyoil to make biodiesel in the United States and concerns over production in Latin America could help soy oil which is down about 13% this year, to claw back some gains to 45-48 cents a pound in coming months.
But palm oil would hover in the RM2,000-RM2,400 a tonne range until the second quarter of next year, when the lean production season will start.
Palm oil, used as a cooking oil and in products from cosmetics to biofuels, has lost 55% since hitting an all-time-high of RM4,486 on March 4. More recently, palm sales have suffered because of defaults.
Sliding palm oil prices have hit shares of Southeast Asia's plantation industry, once most sought after by investors.
Sector bellwethers such as IOI Corp have dived about 47% ever since palm oil prices fell from record highs. Astra Agro Lestari Tbk, Indonesia largest listed planter, has slumped 60%, while Singapore-listed Wilmar International has tumbled almost 40%.
Indonesia and Malaysia, which together account for the bulk of global palm oil production, are expected to produce around 38 million tonnes of the commodity in 2008, around 8%-10% higher than earlier estimates, analysts said.
The expectation of a surge in production comes at a time when appetite for the commodity is waning and top vegetable oil consumers, China and India, are cutting purchases.
This would leave the two countries with tank-bursting stocks of more than five million tonnes by December, the highest ever.
India, the world's second-largest edible oil importer after China, is looking forward to a bumper harvest from summer-sown crops. China is awash with palm oil supplies, with state reserves expected to last until the end of the year.
"A solid soybean crop is coming in full stream," said BV Mehta, executive director of the Solvent Extractors' Association of India. "We will see decline in palm oil demand from November."
India's soybean output is likely to reach a record 12 million tonnes this year, while China is expected to produce a record soybean crop of nearly 18 million tonnes.
China, Europe and other countries normally reduce their intake of palm oil in winter months because the tropical product solidifies in cold temperatures.
"If you look at the figures, palm oil end-stock will shoot, to five million tonnes, we have never seen something like this," said S Paramalingam, executive director of Malaysian brokerage Pelindung Bestari. "The bigger concern now is the drop in exports, October will be equally bad, as September." Exports of Malaysian palm oil products for September slumped by nearly a fifth to around 1.2 million tonnes, data from cargo surveyor SGS showed.
Biofuels, responsible for lifting palm oil out of obscurity a few years ago, are not likely to lend support in the near term.
Even though palm prices have dropped to a point that it makes economic sense to burn it either in a vehicle or a generator, margins are still too low to propel any large scale conversion.
Palm-based methyl ester or biodiesel is quoted around US$790 a tonne in Malaysia, while gas oil -- against which the biodiesel competes -- is selling at US$815 a tonne in neighbouring Singapore.
In addition, a lack of government mandates for blending in Malaysia will prevent investors from reviving their business plans.
"You can't just jump into the biodiesel business just because crude oil prices are falling, it's too volatile for comfort," said Velayuthan Tan, chief executive of IJM Plantations, which has deferred construction of its 90,000 tonne plant indefinitely.
"We prefer to be cautious because Malaysia has made no decisive move to implement the biodiesel policy."
And if the crisis on Wall Street leads to a recession, leading to weak energy consumption, biofuels will take a backseat and won't be a top priority for governments and investors.
"Governments are continuously looking for the right mix of variables such as high oil prices and ample feedstock supplies," said Nathan Mahalingam, managing director of Australia-listed Mission Biofuels "We had this for a time but now oil could be falling faster and palm biodiesel may get unattractive."
Soybean oil, which competes with palm oil, is also not expected to pull up palm as it is enjoying a premium for its increasing use in making biodiesel and output woes.
"In Brazil, they are experiencing severe shortage of moisture and in Argentina you have the drought," said MR Chandran, a vegetable oil industry analyst. "Soyoil is getting a better price also because more of soyoil is getting used in biodiesel."
Unlike soyoil, the share of palm oil in producing biofuels is relatively smaller at less than 5% of global output of 40 million tonnes. In the United States, more than 20% of the soyoil produced is turned into biodiesel. -- Reuters
Ballooning vegetable oil stocks and fast-declining interest from funds in volatile commodities may hold off a recovery in palm oil prices until next year despite its fall to a level much lower than rival soyoil.
Palm oil's discount to soy oil has more than doubled to US$450 (RM1,553) a tonne in just six months as palm has lost half its value since hitting a historic high in March, triggering market talk that palm might have gone too low too soon and would bounce back.
But analysts said rising output in Malaysia and Indonesia and bumper crops in China and India would boost supplies and reduce export demand. And with a worsening financial crisis, funds are fleeing assets that have seen wide price swings recently.
"Panic has forced funds and investors to sell out palm oil," said Martin Bek-Nielson, executive director of United Plantations Bhd "Cash is now king in an environment when stocks are ballooning, exports are dwindling and the global economy is getting shattered."
Rising use of soyoil to make biodiesel in the United States and concerns over production in Latin America could help soy oil which is down about 13% this year, to claw back some gains to 45-48 cents a pound in coming months.
But palm oil would hover in the RM2,000-RM2,400 a tonne range until the second quarter of next year, when the lean production season will start.
Palm oil, used as a cooking oil and in products from cosmetics to biofuels, has lost 55% since hitting an all-time-high of RM4,486 on March 4. More recently, palm sales have suffered because of defaults.
Sliding palm oil prices have hit shares of Southeast Asia's plantation industry, once most sought after by investors.
Sector bellwethers such as IOI Corp have dived about 47% ever since palm oil prices fell from record highs. Astra Agro Lestari Tbk, Indonesia largest listed planter, has slumped 60%, while Singapore-listed Wilmar International has tumbled almost 40%.
Indonesia and Malaysia, which together account for the bulk of global palm oil production, are expected to produce around 38 million tonnes of the commodity in 2008, around 8%-10% higher than earlier estimates, analysts said.
The expectation of a surge in production comes at a time when appetite for the commodity is waning and top vegetable oil consumers, China and India, are cutting purchases.
This would leave the two countries with tank-bursting stocks of more than five million tonnes by December, the highest ever.
India, the world's second-largest edible oil importer after China, is looking forward to a bumper harvest from summer-sown crops. China is awash with palm oil supplies, with state reserves expected to last until the end of the year.
"A solid soybean crop is coming in full stream," said BV Mehta, executive director of the Solvent Extractors' Association of India. "We will see decline in palm oil demand from November."
India's soybean output is likely to reach a record 12 million tonnes this year, while China is expected to produce a record soybean crop of nearly 18 million tonnes.
China, Europe and other countries normally reduce their intake of palm oil in winter months because the tropical product solidifies in cold temperatures.
"If you look at the figures, palm oil end-stock will shoot, to five million tonnes, we have never seen something like this," said S Paramalingam, executive director of Malaysian brokerage Pelindung Bestari. "The bigger concern now is the drop in exports, October will be equally bad, as September." Exports of Malaysian palm oil products for September slumped by nearly a fifth to around 1.2 million tonnes, data from cargo surveyor SGS showed.
Biofuels, responsible for lifting palm oil out of obscurity a few years ago, are not likely to lend support in the near term.
Even though palm prices have dropped to a point that it makes economic sense to burn it either in a vehicle or a generator, margins are still too low to propel any large scale conversion.
Palm-based methyl ester or biodiesel is quoted around US$790 a tonne in Malaysia, while gas oil -- against which the biodiesel competes -- is selling at US$815 a tonne in neighbouring Singapore.
In addition, a lack of government mandates for blending in Malaysia will prevent investors from reviving their business plans.
"You can't just jump into the biodiesel business just because crude oil prices are falling, it's too volatile for comfort," said Velayuthan Tan, chief executive of IJM Plantations, which has deferred construction of its 90,000 tonne plant indefinitely.
"We prefer to be cautious because Malaysia has made no decisive move to implement the biodiesel policy."
And if the crisis on Wall Street leads to a recession, leading to weak energy consumption, biofuels will take a backseat and won't be a top priority for governments and investors.
"Governments are continuously looking for the right mix of variables such as high oil prices and ample feedstock supplies," said Nathan Mahalingam, managing director of Australia-listed Mission Biofuels "We had this for a time but now oil could be falling faster and palm biodiesel may get unattractive."
Soybean oil, which competes with palm oil, is also not expected to pull up palm as it is enjoying a premium for its increasing use in making biodiesel and output woes.
"In Brazil, they are experiencing severe shortage of moisture and in Argentina you have the drought," said MR Chandran, a vegetable oil industry analyst. "Soyoil is getting a better price also because more of soyoil is getting used in biodiesel."
Unlike soyoil, the share of palm oil in producing biofuels is relatively smaller at less than 5% of global output of 40 million tonnes. In the United States, more than 20% of the soyoil produced is turned into biodiesel. -- Reuters
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