By Manirajan Ramasamy and Feiwen Rong

Aug. 26 (Bloomberg) — Malaysia, the world’s second-largest palm oil producer, may act rapidly should prices of the edible oil extend their decline, Plantation Industries and Commodities Minister Peter Chin Fah Kui said today.

“We might need to take immediate measures” if prices “drop drastically below 2,000 ringgit ($590) a ton,” Chin said in a phone interview. The price tumbled as much as 7.5 percent today to 2,406 ringgit a ton.

Palm oil, used in cooking and as an alternative fuel, has slumped 11 percent in two days as supplies from Malaysia and Indonesia, the top growers, outpaced demand. The price plunged 46 percent from a record in March to a 15-month low in August as tumbling crude oil reduced its attraction as a biofuel. Wilmar International Ltd., the biggest palm oil trader, also fell.

“Production is improving in 2009 and 2010 so prices will continue to fall,” Nirgunan Tiruchelvam, assistant director at ABN Amro Securities (Singapore) Pte., said by phone. “Even if they want to intervene, it may not dent overall supply.”

Palm oil closed 7.4 percent lower at 2,409 ringgit a ton today on the Malaysia Derivatives Exchange. That’s above an Aug. 19 low of 2,351 ringgit and compares with the record 4,486 ringgit on March 4.

Wilmar shares dropped 2.7 percent to S$3.64, their lowest close in more than five months. Sime Darby Bhd., the world’s largest publicly traded oil palm grower, fell 1.5 percent to 6.45 ringgit in Kuala Lumpur.

`Clear’ Stockpiles

Malaysia is trying to “ensure there is no oversupply,” Chin said. “We’re encouraging the industry to clear their stocks and asking companies not to import” crude palm oil from other countries like Indonesia.

The country’s stockpiles reached a record 2.04 million tons in June before declining to 1.98 million tons in July, according to the Malaysian Palm Oil Board.

“Last month, we had an oversupply of 2.1 million tons,” Chin said. “That’s too much and we must understand that it’s not only Malaysia that produces palm oil but Indonesia” too.

The two countries produce almost all the world’s palm oil. Indonesia’s output may exceed 19 million tons this year, while Malaysia may produce more than 17.4 million tons, Dorab Mistry, director at Godrej International Ltd., said yesterday at a conference in Kuala Lumpur.

Mistry’s Outlook

Palm oil must drop to 2,200 ringgit a ton in the next few weeks for demand to recover, Mistry said.

“We have at present a deadly cocktail of rising production combined with some demand rationing,” he said. “Prices have to go to the level where they create strong demand growth.”

The slump in palm oil prices has prompted Indonesia to consider mandating use of the cooking oil to make biofuels and Malaysia to boost exports and local consumption to support prices. Buyers in China and India, the biggest importers, are seeking to defer deliveries and renegotiate purchases.

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