Palm oil prices to rise on Indonesian biodiesel mandate

by **Cals** Wed 05 Mar 2014, 18:38

Business & Markets 2014

Written by Reuters

Wednesday, 05 March 2014 16:02

KUALA LUMPUR (Mar 5): Palm oil prices are expected to rise to RM2,900 per tonne by the end of October on strong demand for blending from Indonesia's biofuel sector, leading analyst Dorab Mistry said.

Prices could gain further and hit 3,500 ringgit later this year, which would be the highest since April 2012, if the El Nino weather pattern returns to Southeast Asia and brings prolonged dry spells that would disrupt palm output, he said.

Benchmark Malaysian palm futures hit a 17-month top of 2,868 ringgit on Wednesday amid crop damaging dry weather in Southeast Asia - extending gains of almost 10 percent in February, the biggest monthly rise since October 2013.

Indonesia and Malaysia are the top two palm oil producers, accounting for around 85 percent of the global output.

"If rains come as normal and the high-cycle kicks in from July onwards, prices can trade in a range between 2,900 and 2,600 ringgit from July until October," Mistry said at a palm oil conference in Kuala Lumpur on Wednesday.

"In the event that an El Nino develops, I believe crude palm oil futures will cling to 3,000 ringgit beyond June," Mistry added. "Production is likely to be affected from late 2014 onwards and we may be staring at 3,500 ringgit."

Mistry had previously said prices would trade in a range of 2,600 ringgit to 2,900 ringgit between November 2013 and March 2014, and rise further to 3,000 ringgit by March if Brazil implements a higher biodiesel mandate.

At the time there was talk that Brazil may do this in January - a move that would see 10 percent more of soybeans getting crushed, but this has not come to pass.

Indonesian biodiesel mandate a "game changer"

Palm oil prices will also get a boost as strong demand from Indonesia's biofuel industry soaks up to 3.1 million tonnes of the country's tropical oil, said Mistry, who heads the vegetable oil trading arm at India's Godrej Industries.

"The Indonesian mandate is truly a game changer and will keep palm oil prices relatively high for a long time," said Mistry, referring to Indonesia's move to raise the requirement for minimum bio content in diesel to 10 percent.

But a senior industry official, Fadhil Hassan - executive director of the Indonesian Palm Oil Association, said the country was unlikely to meet its 2014 biodiesel mandate because of the rally in palm oil prices.

Mistry expects global biodiesel demand to grow by at least 3 million tonnes in the year to September 2014 unless vegetable oil prices rise too quickly or oil prices fall too low.

While demand for palm oil from the biofuel industry climbs, major producers may see unfavourable weather hurting output, he said. Total world palm oil output will likely rise by only 3 million tonnes or even less in the year to September, he added.

Mistry retained his earlier estimate that Indonesia will churn out 30.5 million tonnes of crude palm oil this year, up from 27.5 million tonnes in 2013, under normal weather conditions. Output from Malaysia will rise 2.5 percent to between 19.5 million and 19.7 million tonnes.

Global demand

Global vegetable oil stocks, especially palm oil, will remain tight until July, said Mistry. However, supply will start to trickle in after oil palm trees enter a seasonally higher production cycle in the second half of the year.

Mistry estimates total global demand for edible oils to rise by 6.5 million tonnes this year.

India, the world's biggest edible oil consumer, is seen increasing its imports to 11.06 million tonnes in 2013/2014, from 10.67 million tonnes a year ago.

"India is now heavily dependent on imports and its domestic production is not of much consequence," Mistry said. ($1 = 3.28 Malaysian ringgit)