Mistry: Palm oil in for another retreat in prices

He forecasts weakening demand outweighing a decline in Malaysian production

KUALA LUMPUR: Dorab Mistry compared the palm-oil market in 1998 to the Titanic and correctly predicted a slump from then-record prices the next year. He's now forecasting another retreat as weakening demand outweighs a decline in Malaysian production.

Malaysia, the second-largest grower after Indonesia, will reap less than 18.6 million metric tonnes, at least 2.1% below the government's 19 million-tonne forecast, according to Mistry, the director of Godrej International Ltd who has traded vegetable oils for more than three decades. Futures may decline 7.9% to RM2,700 (US$852) a tonne by the end of the year, the lowest since October 2010, unless the United States did more to stimulate growth and boost demand, he said.

“Production has actually underperformed, even worse than I expected,” as Malaysia's palms enter a less-productive point in their cycle after a bumper crop last year, the 59-year-old said. Demand is “just not there,” he said in a July 5 interview at new offices in Singapore that will become a trading hub for Godrej within five years. Palm, the most-consumed vegetable oil, already tumbled 19% from a 13-month high in April on prospects for record global production. Prices for the commodity used in everything from Nestle SA's Maggi instant noodles and Unilever soaps to candy bars and biofuels, more than doubled in the past decade as producers failed to keep up with consumption. There is now mounting concern about demand as European economies sink back into recession and growth slows from China to Mexico.

The slump since April left futures traded on the Malaysia Derivatives Exchange 7.7% lower for the year at RM2,932. Prices might drop as low as RM2,200 if there was a repeat of the 2008 financial crisis, Mistry said in June.

The Standard & Poor's GSCI gauge of 24 commodities fell 2.1% since the start of the year and the MSCI All-Country World Index of equities rose 1.4%. Treasuries returned 3.2%, a Bank of America Corp index shows.

Global palm oil consumption almost doubled in the past decade to 51.7 million tonnes, or about 33% of total demand for cooking oils, US Department of Agriculture data show. At this year's average of RM3,218, total supply is valued at about US$54bil. That compares with about US$2.5bil of outstanding contracts on the bourse in Kuala Lumpur and US$10.1bil of open interest in soybean-oil futures traded on the Chicago Board of Trade, according to data compiled by Bloomberg.

Mistry became known as Mr Titanic after he compared world vegetable-oil prices to the ill-fated liner and he says his speeches at conferences in Kuala Lumpur over the next five years were preceded by Celine Dion's theme song from the 1997 movie.

He predicted in 1998 that the country's palm production would decline on reduced yields caused by El Nino, a weather pattern that can parch parts of Asia.

Output dropped 8.3% to 8.32 million tonnes, the first decline in four years, Palm Oil Board data show. Prices climbed to a then-record RM2,562 in May that year, before plunging 74% by February 2001.

The Indian-born trader, now based in London, has also got it wrong. He said in 2011 that palm would advance to RM4,000 by June this year because of declining output in Indonesia and Malaysia. Prices peaked at RM3,628 in April and the subsequent slump prompted Mistry to reverse his predictions and become bearish.

“He is normally on the extreme side on either up or down,” said Ben Santoso, a Singapore-based analyst at DBS Vickers, the brokerage unit of DBS Group Holdings Ltd., Southeast Asia's biggest bank, who has attended the annual palm oil conference in Malaysia since 2001. “Nevertheless, we have to take consideration of what he said, the reasoning that he put out and see whether we've missed something.”

While Mistry says his forecasts have a 70 % success rate, he discounts those other analysts might consider accurate. He said in February 2008 that prices would reach 4,500 ringgit. In the four days after his speech, futures jumped 16 % to 4,486 ringgit before retreating to a three-year low of 1,331 ringgit in October. He says that was “a big failure” because he had predicted a gradual advance over the year. - Bloomberg

After the crash, his best trade was buying palm stearin, derived from oil and used for products such as margarine. He said prices would rally because the U.S. would intervene to halt the rout. The Federal Reserve bought $2.3 trillion of debt in two rounds of so-called quantitative easing from December 2008 to June 2011. Palm futures more than doubled as the Standard & Poor's GSCI gauge of 24 commodities rose about 90 %.

Kalimantan Plantations

The Singapore office on the 24th floor of a 50-storey skyscraper will be the regional trading hub for Godrej International Trading and Investments Pte, a unit created in 2010. The company, which Mistry plans to visit once a month, will also oversee about 20,000 hectares (49,400 acres) of land owned with local partners in Indonesia's Kalimantan, 20 % of which is already planted.

Godrej is investing in plantations to reduce its reliance on suppliers. The group uses vegetable oils for products including its Cinthol soap, sold in India since 1918, and to supply its Godrej Industries Ltd. unit, which makes chemicals. The Godrej Group based in Mumbai, which started in 1897 as a lock manufacturer, is led by Indian billionaire Adi Godrej.

Mistry was born in the western Indian state of Gujarat in 1953, moving with his family to Mumbai three years later. He attended Bombay University and later qualified as an accountant. Since moving to the U.K. with Godrej in 1977, he has been part of the 5,000-strong community of Zoroastrians, who follow an ancient monotheistic religion founded in Persia.

Zoroastrian Role

As a past president of the Zoroastrian community in Europe, Mistry counts the mother of Freddie Mercury as one of his friends, although he never met the singer of rock band Queen, who died in 1991. He was a guest at Queen Elizabeth II's Golden Jubilee celebration in Westminster Abbey in 2002.

As a self-described “one-man research team,” Mistry tracks weather patterns as well as supply and demand. His sources include the plantation industry and data from the USDA and Oil World, a Hamburg-based research company. The married father of three speaks at conferences about five times a year.

“Most people do realize that it's a tough job and it's brave of someone to openly speak about prices,” Mistry said. “They also know it's a market: you can't be right 100 % of the time.”

--Editors: James Poole, Philip Revzin

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