Palm oil, used in everything from candy to biofuels, may tumble 9 percent to the lowest level in 20 months as a slowdown in China and Europe curbs demand, according to Dorab Mistry, director at Godrej International Ltd.
Futures may slump to as low as 2,700 ringgit ($848) a metric ton from 2,968 ringgit in the absence of fresh stimulus by the U.S. to revive growth, said Mistry, abandoning his forecast for prices to reach 4,000 ringgit. The most-active contract last traded below 2,700 ringgit in October 2010. Futures may rebound to 3,300 ringgit as the decline may stimulate demand, he said at a conference in Mumbai yesterday.
Prices have slumped 18 percent since climbing to a 13-month high in April as growth slowed in China, the biggest cooking-oil user, and the debt crisis worsened in Europe. A decline in prices may cut costs for companies such as Nestle SA (NESN), the world’s largest food company, while reducing profits at producers including Sime Darby Bhd (SIME) and Wilmar International Ltd. (WIL)
“The scenario on commodities has darkened considerably in the world at large,” said Mistry, who’s traded palm oil for more than three decades. “The main catalyst as far as palm oil prices are concerned has been the fall in crude oil prices. The logic has been that biodiesel demand is the swing factor and as crude oil falls, biodiesel becomes uncompetitive.”
Biodiesel demand this year may see “very little growth” as the drop in oil prices reduces consumption for non-mandatory use, he said. Palm oil’s use in biofuels may expand by only 1 million tons this year, while its demand for food will expand by 2 million tons, he said. Brent crude oil prices have declined 8.1 percent this year, weakening demand for the tropical oil.
A further decline in crude prices in the absence of stimulus measures from the U.S. “will see the opening up of the gates for prices to fall further,” said Nagaraj Meda, managing director of TransGraph Consulting Pvt., who has forecast prices for 13 years.
Federal Reserve Chairman Ben S. Bernanke said yesterday the Fed will need to assess conditions before deciding if more measures are required to stoke an economy threatened by Europe’s debt crisis and budget cuts.
Palm oil for delivery in August fell as much as 1.8 percent to 2,922 ringgit before ending the morning session at 2,968 ringgit on the Malaysia Derivatives Exchange.
“On the whole, demand growth has been disappointing,” said Mistry. “The Chinese consumer of vegetable oils has tightened his belt and we have not seen the strong year-on-year rise in consumption as in the past.”
China’s economy will expand 7.9 percent this quarter from a year earlier, the least in three years, based on the median estimate in a Bloomberg survey. That compares with average growth of 10 percent in the last five years. The People’s Bank of China cut interest rates yesterday for the first time since 2008, stepping up efforts to combat a deepening economic slowdown. The one-year deposit rate will drop to 3.25 percent from 3.5 percent effective today, it said.
India, Asia’s third-largest economy, grew 5.3 percent last quarter, the least since 2003, government data showed last week. Vegetable-oil imports by India, the biggest palm buyer, will gain 9 percent to 9.48 million tons in 2012-2013, Mistry said. “India’s imports of palm so far are well ahead of the previous year. The period of out-performance has come to an end” as a decline in rupee against the dollar increases costs, he said.
The rupee, the worst performing currency in Asia this quarter, fell to a record low of 56.515 a dollar on May 31. India imports nearly 55 percent of its annual vegetable oil needs of almost 16 million tons.
Crude soybean oil will rebound to about $1,200 a ton free- on-board by the end of this year after falling to $1,000 a ton, Mistry said. Rapeseed oil may trade at a premium to soybean oil even with an expansion in canola output, he said.
Palm-oil output in Malaysia may decline as much as 900,000 tons from January to July from a year earlier, Mistry said. A rebound is unlikely before August at the earliest, he said.
“The decline in seasonal growth is truly staggering and something we have not seen in years,” he said. “Within the first five months of 2012, we have a cumulative deficit of almost 500,000 tons.”
Production may rebound in the second half, bridging the shortfall, said Choo Yuen May, director-general of the Malaysian Palm Oil Board. Output will reach 19 million tons this year as harvesting peaks in the coming months, she said in an interview yesterday. The country produced a record 18.9 million tons in 2011, according to the board.
El Nino Threat
“There is a strong chance of an El Nino phenomenon arising later this year from August onwards,” Mistry said. “The initial effect of this hot and dry weather will be to accelerate the ripening of fresh fruit bunches and give us higher production in the first few months.”
El Nino weather conditions, which can parch Asia and bring cooler weather to the U.S., are likely to develop in the coming months as the Pacific Ocean continues to warm, Australia’s Bureau of Meteorology said on June 5. The oil-palm bears fruit all year, with more output in the second half. Drought, such as the one caused by El Nino in 2010, can hurt yields.
“There are now definite signals of an emerging El Nino and if those signals give us an El Nino, prices will recover faster than most people expect,” Mistry said.
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