Malaysian palm oil prices could drop to 2,600-2,700 ringgits/tonne till end of 2012 as weaker global economic growth slows demand while supply rises at a faster rate, analyst says

Nevin Barich

KUALA LUMPUR, Malaysia , September 24, 2012 (Thomson Reuters) – Palm oil prices could drop to 2,600 ringgit-2,700 ringgit ($852-$885) per tonne till the end of this year as weaker global economic growth crimps demand at a time when supply rises at a faster rate, an industry analyst said.

The forecast by Dorab Mistry, head of edible oil trading with Indian conglomerate Godrej Industries <GODI.NS>, represents up to a near 6 percent drop from current prices as more demand has not kicked in despite palm oil's discount to rival soyoil.

"Demand for palm oil in particular and for vegetable oils in general has been softer than expected in 2012," Mistry said, according to a transcript of a speech to be delivered on Sunday at a regional industry conference in the Indian port city of Mumbai.

"(This is due to) much slower growth in the production of bio fuels from vegetable oil and the difficult economic situation in developing countries, coupled with high prices," he added.

Also, with Indonesia adjusting its export taxes to favour the shipment of refined palm oil cargoes and grabbing market share from Malaysia, Mistry said there was a 50 percent chance futures will drop to 2,300 ringgit in the last quarter of 2012.

Malaysia, the world's second largest palm oil producer after Indonesia, has been pushing shipments under a tax free crude palm oil export scheme to top edible oil buyer India in a bid to reduce swelling stocks and retain business.

"This is the best destination for these palm oil shipments and therefore stocks in India as at the end of October as well as pipelines will be higher than previous years," Mistry said.

But coupled with new harvests of oilseeds in India, Malaysia will export less with stocks continuing to grow in the last quarter of 2012.

Mistry said it would be not be surprising if Malaysia's palm oil stocks rise to 3 million tonnes at the start of next year. September opening inventory levels hover around 2.1 million tonnes, according to government data.

Surging Malaysian stocks come as Indonesia's inventories had been growing since 2010 to 3.5 million-4 million tonnes a month, in part due to rising production and infrastructure bottlenecks, Mistry said.

A high production cycle for palm oil in Southeast Asia that started in June is boosting supply, he said, although it may last till mid-December as mild El Nino weather condition could cut the season short.

El Nino tends to bring drier weather to the region, leading to oil palms producing more male flowers that do not produce the edible oil.

"We need to watch rainfall in September, October and November. If, as some weathermen expect, we have heavy rain in November, the high (production) cycle may be further extended," Mistry said.

The London-based analyst adjusted his forecast for Malaysian crude palm oil production this year to 18 million tonnes from 18.2 million tonnes. Malaysia's government forecasts peg output at 18.4 million tonnes, down 2.6 percent from last year.

Indonesian production is likely to overshoot, with Mistry revising forecasts to 27.5 million tonnes from 27 million tonnes. In contrast, the Agriculture Ministry saw production at 25.7 million tonnes.

(Reporting by Niluksi Koswanage; Editing by Jeremy Laurence)

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