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