Prospects for global vegetable oil supplies to grow faster than demand next year, putting a halt to an impressive price rally, are likely to dominate a palm oil meeting in Indonesia this week. Resilient Asian demand, and tight stocks of soyoil and palm oil due to drier weather, have combined with a weaker US currency to drive up palm prices by 46 percent so far this year, which saw one of the worst financial downturns in decades.
But some are wary that the industry may be poised for a major correction thanks to an incoming bumper soybean harvest in the United States and South America and fewer markets for palm oil products to penetrate. These concerns will be the main focus of the three-day Indonesian Palm Oil Conference and Price Outlook 2010, which kicks off on Wednesday with price forecasts and industry forums.
"These conferences always drive the prices up or down for a short period of time, but fundamentally I think we are in for a bear run," said a leading Malaysian palm oil trader. Concerns of El Nino's drier weather sapping palm oil yields have eased, prompting top producer Indonesia to lift its 2010 palm oil forecast to 22-23 million tonnes from 20.5 million tonnes earlier.
Malaysia has raised its 2010 output forecast to up to 17.7 million tonnes from a projected 17 million tonnes this year, the government said, despite expected heavy rains toward the end of 2009 that are likely to complicate transport of palm oil to refineries and ports. "The impact of heavy rains will be felt to some extent next year in Malaysian production," said another vegetable oils trader in Malaysia who deals with West Asian palm oil buyers.
"But Indonesia will definitely make up for any shortfall, so ultimately, prices are not going to rally so much in 2010." Analysts said top buyers India and China will take up much of the food demand for palm oil so long as the vegetable oil's discount to soyoil remains wider than $120 a tonne. The discount now stands at $150 a tonne, traders say.
But for the global biodiesel sector, palm oil will be largely left out on concerns that its production fuels estate expansion in Southeast Asia at the expense of rainforests and wildlife, and given its high premium over crude oil. "It's not going to be the palm-based biodiesel story for next year," a trader with a top plantation firm in Malaysia said. "Palm oil will just fill the gaps in food demand in South America and Europe as soyoil and rapeseed oil get diverted into the alternative energy sector."
But that works if crude oil prices can average $75 a barrel next year, said an analyst with a Singapore-based investment bank, who pegged palm oil at a trading range of 2,300 ringgit to 2,600 ringgit ($678.8-$767.4) per tonne. "Basically, the risk for that is on the upside, let's say crude oil price is higher or if the El Nino get stronger and if there is a jump in soybean crush," the analyst said.
For estate owners the sector would do well so long as margins did not significantly erode. The cost of producing a tonne of palm oil is up to 1,200 ringgit and based on current future prices of 2,440 ringgit, profit margins stand at more than 100 percent. "You can't find many other agricultural commodities with that sort of return," said Martin Bek-Nielson, executive director of Malaysia's United Plantations.
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