Palm oil prices may surge

Palm oil prices could climb as high as RM2,800 per tonne in the next six months, leading industry analyst Dorab Mistry said on Thursday, but gains will hinge on output in top producer Indonesia and the success of its biodiesel mandate.

Mistry's forecast, given at a vegetable oil meeting in China, reverses his earlier prediction that prices would be stuck in a RM2,200-RM2,400 range and could even fall to RM2,000 in early January if competing oilseeds flood the market and crude oil prices fall.

Palm oil futures will probably trade in a range of RM2,400 to RM2,600 per tonne, said Mistry, who heads the vegetable oil trading arm at Indian conglomerate Godrej Industries.

But he added: "There's a possibility that with good demand of palm-biodiesel in Indonesia, and not very good crude palm oil production in January and February, we may see prices climb higher to RM2,800."

However, he cautioned that such a rise could dent demand and lead to declines in the second half of 2014.

"A good trade would be to buy Jan-Feb-March 2014 and to sell either July-August-September or October-November-December 2014," he added.

Seasonal smaller yields of palm oil in Malaysia and Indonesia, which together account for almost all of the world's supply of the tropical oil, have supported the market, and benchmark prices have risen around seven per cent so far this year.

Traders and analysts say output will probably fall further as monsoon rains become heavier into the end of the year.

In September, Indonesian industry officials scaled back their 2013 palm oil output target, saying wet weather would disturb pollination of the fruit. The world's top producer now expects its output to rise to between 26.7-27 million tonnes this year compared to the 28 million previously forecast.

Mistry forecast global palm oil supply would rise by 2.5 million tonnes in the vegetable oil year starting from October
2013, lower than his previous estimate of 3.5 million.

Mistry said palm oil prices would be influenced by biodiesel developments in Indonesia, where the government recently set a requirement for a 10 per cent palm oil blend, up from 7.5 per cent.

"It will not surprise me if Indonesia makes a huge effort and raises its consumption of palm biodiesel in 2014 to at least 2 million or even 2.5 million tonnes," Mistry said.

Malaysia, the world's No.2 producer, could introduce its own higher blending requirements of seven per cent as soon as December, industry officials have told Reuters, as it looks to whittle down palm oil stocks and cushion prices in the face of growing competition from other edible oils.

Crude palm oil is increasingly used as a "green" additive to fossil fuels as it can cut costs and reduce environmentally damaging emissions.

"Domestic mandates for palm biodiesel in Indonesia and Malaysia will work — so long as palm oil prices remain competitive with Brent crude prices," said Mistry.

But he warned that higher palm prices may mean governments in both Southeast Asian countries having to fork out bigger subsidies to protect local people.-- Reuters