UBS expects palm oil extending slump on outlook for supplies

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PALM oil’s rout is set to deepen with prices extending declines to less than RM2,000 (US$630) a metric tonne on ample global supplies of edible oils, according to Wayne Gordon, an analyst at UBS AG.

“The overall vegetable oil sector is effectively swimming in supply, or will be swimming in supply by the time we get to the end of the year,” Singapore-based Gordon said in a phone interview.

The most-active price on Bursa Malaysia Derivatives fell to RM2,045 ringgit on Wednesday, the lowest level since October 2009. It last traded below RM2,000 in March of that year.

Palm oil tumbled into a bear market last month as favorable weather in the US spurred forecasts for a record crop of soybeans, which can be crushed to provide an alternative oil.

Palm also slumped as demand for biofuels missed expectations, forecasts for an El Nino weather pattern, which can disrupt supplies, were scaled back, and the ringgit strengthened.

Lower prices will help keep global food costs in check, while hurting earnings at growers including Kuala Lumpur-based Sime Darby Bhd.

Palm oil needs to decline by more than soybean oil to attract increased demand from India, the world’s biggest importer, according to Gordon, who’s tracked the commodity since 2009. Further losses in soy oil may weigh on palm, he said.

Soybeans fell to US$10.35 a bushel in Chicago on Wednesday, the lowest level since September 2010, while soy oil traded at 32.76 cents a pound, the lowest since March 2009.

Palm oil’s discount to soy oil was at US$84.95 a tonne yesterday, compared with an average of US$244 last year, data compiled by Bloomberg shows.

The US soybean crop is expected to rise to a record 3.816 billion bushels this year, the US Department of Agriculture said last week.

Losses in the oilseed’s price this week came as pod counts from an annual field tour across the world’s biggest producer signaled a bumper crop.

Reports from the first three days of the Pro Farmer Midwest Crop Tour showed higher tallies in Illinois, Ohio, Indiana, Iowa and South Dakota.

Malaysia, the largest palm oil producer after Indonesia, was delaying the nationwide implementation of a biodiesel mandate to the end of the year, Plantation Industries and Commodities Minister Douglas Uggah Embas said this month.

Indonesia’s use of palm biodiesel in the first five months of this year is roughly the same as in the same period a year earlier, and full-year consumption won’t increase, Dorab Mistry, director at Godrej International Ltd, said in June.

The odds of an El Nino event occurring during the southern hemisphere’s spring, which starts in September, was reduced to about 50 percent from an earlier forecast of 70 per cent, Australia’s Bureau of Meteorology said this month and in July. The weather pattern can bring drought to parts of Asia.

“On the weather front, most of the people who were still neutral-to-bullish in the market were relying on the potential for an El Nino event to potentially constrict production in palm oil in the fourth quarter and then into the first quarter,” said Gordon.

“That probability has been reduced, so some of that risk that was sitting in the price has been washed out.” — Bloomberg