KUALA LUMPUR: Palm oil may extend losses from the lowest level since 2009 until prices approach the cost at which growers in Asia produce the world’s most-consumed cooking oil, according to Dorab Mistry, director at Godrej International Ltd Futures.
“We know from experience that during bear markets, the price tends to gravitate toward the cost of production,” Mistry said, without giving a price target or time frame. Private-sector estates in Malaysia and Indonesia have costs of about RM1,500 to RM1,600 a tonne, Mistry said. Futures in Kuala Lumpur closed at RM2,012 a tonne on Tuesday.
Palm oil entered a bear market last month on swelling global supplies of edible oils, including what is set to be a record soyabean harvest in the United States.
Futures also slumped as demand for biofuels missed expectations and as forecasters reduced odds for the onset of El Nino, which can disrupt supplies from Indonesia and Malaysia, the biggest producers. The decline will help curb global food costs, while hurting earnings at growers.
“The world is awash with vegetable oils,” said Mistry, who has traded oils for more than three decades and addresses conferences on the outlook for supply, demand and prices. “So, it is not difficult to guess where prices will end up.”
Forecasts made in June would have to be scaled down, wrote Mistry, who is scheduled to speak in Shanghai on September 15. In June, he said in Mumbai that palm oil could climb to RM2,800 by December should an El Nino
occur from middle of this month. He also said it may trade between RM2,300 and RM2,500 for a few weeks, and risked rising to RM2,600 if a dry period in Asia persisted.
Futures fell seven per cent last month and extended declines this month, dropping to RM1,954 on Monday, the lowest since March 2009. Prices reversed an advance of as much as two per cent yesterday to trade 0.2 per cent lower at RM2,008 at 3.14pm, here, taking this year’s losses to 24.5 per cent.
Indonesia and Malaysia account for 86 per cent of global supplies, according to the US Department of Agriculture. Costs of output at one large state-linked plantation in Malaysia are as much as RM1,800 a tonne, Mistry wrote.
“The absence of El Nino has been a huge disappointment for palm bulls,” said Mistry. “However, we must always remember — the seeds of the next bull market are sown in the current bear market.”
UBS AG, Standard Chartered Plc and CIMB Investment Bank Bhd are among forecasters seeing a price rebound, and futures trade higher next year than for delivery in November, the most-active contract at present. Palm oil may rally to RM2,200 to RM2,400 late in the fourth quarter as users rebuild reserves and biofuel demand rises on cheaper feedstock, Ivy Ng, an analyst at CIMB, said. Bloomberg