Palm Oil Set for Rally in Second Half

CRUDE palm oil (CPO) futures may rise about 20 per cent to trade close to RM3,000 in the second half of 2010 as erratic weather slows production growth and demand strengthens, a top industry analyst said yesterday. Godrej International’s head of vegetable oil trading Dorab Mistry said there has been a strong catch-up rally in vegetable oil prices, particularly palm oil, which currently trades at around RM2,500 per tonnes on Bursa Malaysia Derivatives. Palm oil gained 6 per cent in July, after dropping for two straight months before that. “CPO on Bursa will trade close to RM3,000 and then perhaps even climb above that target, depending on how production shapes and the world economy performs,” Mistry said in a speech to be delivered in Brazil. Top producers, Indonesia and Malaysia, are facing lacklustre production after El Nino-driven drier weather sapped yields and stunted the development of oil-rich female palm flowers in the first half of 2010. This was followed by the La Nina weather pattern, which could deal another blow to production as it brings more rains and stalls harvest of palm fruit bunches in certain areas. Planters are concerned that heavy rains may cause floods towards the end of the year and complicate the task of transporting palm oil to refineries and ports. “I stand by my forecast of Malaysian CPO production in 2010 at 17.2 million tonnes. Indonesian CPO production has also disappointed and I feel compelled to reduce my forecast of growth to just 500,000 (from one million tonnes),” Mistry said. Mistry’s forecast for Malaysian production is lower than government’s revised target of 17.8 million tonnes. Indonesia had earlier aimed to produce 22.5 million tonnes of palm oil this year, from 20.6 million tonnes in 2009. “CPO production during the Ramadan period will be flat to lower and recovery will have to wait until October,” he said. Muslim holy month of fasting that started mid-August that will see Indonesian plantation workers taking leave. Palm oil’s key rival, South American soyaoil, could rise 21 per cent to US$1,050 (US$1 = RM3.14) free on board Argentina as demand from emerging markets as well as top vegetable oil consumers India and China will outpace production, Mistry said. He did not give a time frame of the rise but said soyabean oil will rise to maintain healthy premium over palm oil as crushing will give lower oil yields despite bumper crops in South America. Currently, cash palm oil is at a 2.3 per cent discount to soyaoil after trading at a premium in the early 2010 due to supply fears arising from El Nino. “Soyabean production can be expanded if prices are high enough, but we all know that soyabean is not an oilseed but a meal seed. The onus falls on the palm oil complex,” Mistry said, referring to the tropical oil’s high yields and aggressive estate expansion. – Reuters Source : Business Times

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