Barefoot Investor: Analyst: Palm Oil likely to drop RM2,600 by June 2011 - (NST , Business Times)

MALAYSIAN palm oil should fall to RM2,600 by June 2011 on higher output in Southeast Asia and a decent soya crop but the pace of decline will be slower than the market expects, thanks to unusually low stocks, a key analyst said last Friday.

The forecast by LMC chairman James Fry represents a fall of 20.6 per cent from current palm oil futures, which closed at RM3,276 a tonne on Thursday, and takes into account palm oil's higher than usual premium over diesel.

"It is hard to see why this gap should widen since biofuel demand can adjust downwards. A normal crude palm oil to diesel gap of US$150 (RM471) by June means RM2,600," London-based Fry told an industry meeting in Kuala Lumpur.

"Weak output and high exports imply low stocks till mid-2011, pushing spot CPO above soya oil prices. After that, output and stocks should grow strongly."

Front-month crude palm oil has gained 30 per cent this year on fears that heavy rains induced by La Nina will hurt output in top producers Indonesia and Malaysia, outpacing US soya oil's rise of 24 per cent.

That means crude palm oil futures will have to remain in backwardation, which will prompt overseas buyers to delay purchases, Fry said.

Competing soya oil will increasingly fill global vegetable oil demand, given a recent surge in palm prices and the approach of the northern hemisphere winter, when the tropical oil solidifies.

Soya oil will be attractive to buyers as South American planting has not been so much affected despite the warnings about the La Nina-driven drier weather potentially sapping yields, Fry said.

"South American output is still uncertain, but a special factor is the impact of Argentine politics," he said, referring to the world's biggest exporter of soya oil and one of the top suppliers of soya beans. "Farmers may delay bean sales in the hope of cuts in export taxes."

Although palm oil output and stocks will be tight for the next few months, new areas, mainly in Indonesia, that are coming into production due to a commodities boom in 2007 and 2008 will add at least 3.5 million tonnes to total output, Fry said. - Reuters

Read more: Analyst: Palm oil likely to drop to RM2,600 by June


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