Business Times

Wednesday, August 27, 2008

Palm oil prices may not fall further as domestic demand will recover ahead of fasting month and end-year festivities, says an industry group

BUYERS have been snapping up cheap palm oil, traders and industry officials said on Tuesday, but the prospect of defaults and rising supply still hangs over the market.

Malaysian palm futures tumbled 6 per cent, bringing losses this week to more than 10 per cent, after leading industry analyst Dorab Mistry painted a bearish picture and Dalian soyoil fell by its daily limit.

This was despite Chinese traders at an industry conference saying the country’s buyers had secured 150,000 tonnes of refined, bleached and deodorised palm olein in the past few days, and Indonesia’s main producers body saying defaults were unlikely.

“The market has somewhat stabilised and we have seen some comfortable buying. In the last few days Chinese firms have bought 150,000 tonnes of RBD palm olein to be delivered at Guangzhou and Tianjin,” a leading Chinese trader said.

Demand from China has been rekindled after sharp falls in palm oil prices compelled the world’s largest consumer of vegetable oils to default on purchases, along with India, another top buyer.

But Chinese traders warned that further price falls could spark more defaults on purchases, after Indian and Chinese buyers defaulted on or renegotiated 800,000 tonnes of palm deals as Malaysian futures fell by 45 per cent from a record high in March.

“Since stock levels are high, palm prices are bound to be pressured, and there is a high possibility of defaults for October to December deliveries,” a second Chinese trader said.

Chinese traders said Malaysian companies were not directly affected, unlike Singapore-listed Wilmar International, which holds a lion’s share of the palm oil traded with China.

“Malaysia companies do not have to worry so much about defaults as it is the Singapore companies like Wilmar which have such a high exposure,” the trader said.

Shares of Wilmar, the world’s largest listed palm oil firm, fell 2.7 per cent.

INDONESIA AVOIDS DEFAULTS

Indonesia’s palm oil producers have managed to avoid large-scale defaults, but at the cost of re-negotiating prices of export contracts signed before the large price fall, the executive chairman of the country’s leading palm oil industry body said.

Derom Bangun of the Indonesian Palm Oil Producers’ Association said the country’s overall palm oil exports were likely to rise by 10 per cent in 2008, from last year’s 13 million tonnes, despite market volatility.

“Biodiesel producers are building up stocks now, after the market crash. If crude oil rises a bit more, biodiesel producers will find it profitable to resume production,” he said in an interview.

Palm oil prices may not fall further as domestic demand will recover ahead of fasting month and end-year festivities while production will begin to slow down in September, he said.

But Mistry, a director with Indian firm Godrej International, has halved a call made earlier in the year for palm to top RM4,500, instead saying surging supply meant prices would have to fall to RM2,200 (US$649), nearly 10 per cent off current prices, to trigger new demand.

China’s soyoil futures ended a week of gains that had lifted prices by 10 per cent, falling by the daily 5 per cent limit today on talk that Beijing could cut the tax on cooking oil.

But domestic traders said the cut in the 9 per cent import tax was unlikely, with vegetable oil prices already falling far from their highs.

“We do not think it is possible. Prices have already come down so much, and there is no need for the government to intervene right now,” said an analyst with a government think-tank. - Reuters

 

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