Palm Oil Must Drop to 1,900 Ringgit to Lure Buyers, Mistry Says

Sept. 27 (Bloomberg) -- Palm oil, the world’s most consumed vegetable oil, must drop 13 percent from current levels to stoke demand amid mounting stockpiles in Malaysia, according to Dorab Mistry, director of Godrej International Ltd.

Palm oil, used in food and biofuels, needs to drop to 1,900 ringgit a ton ($547) for demand to rebound, Mistry said today at a conference in Mumbai. Futures for December delivery gained 3.4 percent to 2,186 ringgit on Sept. 25 in Malaysia.

Prices of the tropical commodity, which competes directly with soybean oil for use in cooking and to make biodiesel, have climbed 29 percent this year on concern about a global oilseed shortage. The rally has been aided by higher crude prices and speculation the global economy is recovering.

“I believe crude palm oil prices need to fall from current levels in order to stimulate demand,” said Mistry, who’s been trading edible oils for more than three decades. “Prices need to become more competitive if biodiesel usage is to expand. This is not the case at present but it needs to happen.”

Reserves in Malaysia reached a six-month high last month after production climbed to the second-highest level on record and exports dropped the first time in four months. Stockpiles rose 6.2 percent to 1.42 million tons in August from July, the nation’s palm oil board said Sept. 10.

“If a major stock build-up can be avoided, by letting the market find a clearing level, it would clear the way for a good bounce in prices” in the first quarter of 2010, Mistry said.

Palm oil may reach 2,400 ringgit in the first quarter of next year because of a seasonal decline in production and tight soybean oil supplies, he said. Output typically reaches a peak in the third quarter, and 55 percent of annual production is harvested in the second half of the year.

El Nino

“As we enter 2010, I believe production will decline due to seasonal factor and also due to the effects of the current El Nino,” Mistry said.

Production in Malaysia may be 17.5 million tons this year and expand by 500,000 tons next year, while output in Indonesia may be 21.5 million tons this year and grow by 2 million tons in 2010, Mistry said. The two countries are the biggest producers.

While Malaysia’s production is on track this year to exceed last year’s record 17.7 million tons, output next year may drop by 5-16 percent if the El Nino weather event occurs, Plantation Industries and Commodities Minister Bernard Dompok said in July. The country in April forecast 2009 output of 18.3 million tons.

“The general expectation is that it will be a mild El Nino and that production will grow strongly once the effect of El Nino peters out in the second half of 2010,” Mistry said.

Predictions

Mistry said his price outlook for palm oil is based on the assumption that crude oil will trade at between $65 and $80 a barrel until the spring of 2010.

Mistry on Aug. 4 correctly predicted palm oil will drop to 2,100 ringgit a ton as inventories build on increased production. Mistry had forecast twice in May that prices may climb to 3,000 ringgit, driven by a “powerful bull market,” including rising demand from India.

Palm oil peaked at 2,799 ringgit on May 13.

Godrej is one of the largest importers of edible oils into India, the biggest consumer of palm oil after China.