Palm oil will probably drop in the next few weeks toward the cost at which growers in Asia produce the world’s most-used cooking oil as supplies exceed demand, according to Dorab Mistry, director at Godrej International Ltd.
The commodity will retreat to about 1,900 ringgit ($590) a metric ton, Mistry said, according to remarks prepared for a conference in Shanghai. That’s 8.8 percent below last week’s close for the benchmark contract on the Bursa Malaysia Derivatives and would be the lowest price since March 2009.
The oil used in food and biofuels slumped to a five-year low this month as output from Indonesia and Malaysia outpaced demand amid a glut in global cooking oil supplies, including soybean oil. It’s a good time for investors to buy shares in palm growers and processing companies, which will benefit when the price cycle turns, he said, without identifying stocks.
“It is almost impossible to forecast a bottom at this stage of the production cycle,” said Mistry, who’s traded vegetable oils for more than three decades. “However, producers are still very much in the money and I do not foresee prices going below cost of production.”
Mistry’s address today echoes comments that he made in e-mailed remarks to Bloomberg News last month, when he said the “world is awash with vegetable oils,” and forecast that palm oil would drop toward the cost of output.
Palm dropped 22 percent this year to 2,084 ringgit a metric ton on Sept. 12 in Kuala Lumpur. Prices fell to a five-year low of 1,914 ringgit on Sept. 2, then rebounded after the Malaysian government scrapped an export levy for this month and October.The most-active contract was at 2,110 ringgit at the midday break today. Palm’s discount to soybean oil was $71.95 a ton on Sept. 12 from last year’s average of about $244.
Full-year output in Malaysia, the largest grower after Indonesia, will probably be more than the 19.7 million tons to 19.9 million tons initially estimated, said Mistry. In the first eight months, supply was 12.76 million tons, 991,000 tons more than a year earlier, while exports dropped 6.6 percent to 10.99 million tons, he said. Indonesian production is also ahead of expectations, he said.
Stockpiles will continue to rise and peak in December, Mistry said. Reserves in Malaysia jumped 22 percent to 2.05 million tons in August from July, the biggest percentage gain since October 2009, Malaysian Palm Oil Board data show.
“In the fourth quarter of 2008, we were facing a similar situation with regard to supply, demand and price,” Mistry said. “At that time, palm rapidly made itself competitive and exported its way out of a crisis as Malaysian stocks peaked at 2.238 million in December 2008.”
Imports of vegetable oils by India, the biggest palm oil buyer, surged to 1.34 million tons in August and may exceed 1 million tons this month, Mistry said. Many vessels carrying palm oil to China were diverted to India in August, and berths there are now congested, he said. Chinese imports will probably remain thin for at least the next three months as high-priced stockpiles are used up, he said.
After the record U.S. soybean crop this summer, farmers in Brazil and Argentina may switch to soybeans from corn this year, according to Mistry. Argentina will probably also have to devalue its currency, he forecast. A cheaper local currency can boost a country’s overseas shipments.
Palm oil’s drop hurt shares in growers. In Singapore, Golden-Agri Resources Ltd. (GGR) lost 7.3 percent this year to 50.5 Singapore cents on Sept. 12, while Wilmar International Ltd. retreated 6.7 percent to S$3.19. In Malaysia, Kuala Lumpur Kepong Bhd. has fallen 12 percent in 2014.
“I am often asked these days if palm plantation and processing company equities should be bought: my answer is a resounding yes,” Mistry said. “You invest in plantations when palm oil prices are low. I prefer processing companies which manufacture speciality fats, oleochemicals, biodiesel and own consumer brands. Upstream companies will benefit when the price cycle turns. However, this is a very good time to invest.”
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Source : Bloomberg