Prices of palm oil plummeted 23 percent last year largely on a stockbuild in major producers Indonesia and Malaysia, and traders and analysts at a conference in Kuala Lumpur said they could fall further when global oilseed supply kicks into high gear later this year.
"In 2013 post-September, we see big supplies of soybeans, sunflower seeds and even of palm oil, which will be entering a new high cycle. We have also begun the oil year with the heaviest carry-over stocks in history," leading industry analyst Dorab Mistry said on Wednesday at the meeting.
Indonesia, the world's top palm oil producer, does not publish official data on inventory levels, but they were estimated at 5 million tonnes in January, while No. 2 producer Malaysia started 2013 with record stocks of 2.63 million tonnes.
"Therefore the outlook further forward, given normal weather, is bearish," continued Mistry, who is also the director of Indian conglomerate Godrej International Ltd.
Conference attendees were also focusing on inventory in top buyers India and China, which rose to record levels in February as traders stocked up ahead of changes in policy by their respective governments.
Mistry said prices should remain in a 2,300-2,500 ringgit ($740-806) range until end-April, warning that trading may be more volatile due to a looming election in Malaysia. Prices stood at around 2,400 ringgit on Wednesday.
Palm oil's geopolitical risk was highlighted during the industry meeting, which coincided with a prolonged standoff between the Malaysian military and an armed Filipino group on Borneo island that has forced several refineries there to slow operations.
Improving soybean output from South America, estimated to grow more than 20 percent this year, may push down palm oil prices to 2,200 ringgit after mid-April, Mistry added. A higher soybean supply for crushing into vegetable oil could shift demand away from rival palm oil.
While prices may slump further on expanding palm oil output in July-August, Mistry did not foresee prices falling below 1,800 ringgit unless Brent crude oil drops under $80 per barrel from around $112 on Wednesday.
But food and energy demand for vegetable oil should remain supported by low prices, especially after the U.S. Congress passed a blending tax credit for biodiesel in January.
"I am estimating world food demand to grow by 3.5 million tonnes, mainly as a result of lower prices," said Mistry, noting that biodiesel demand worldwide could expand by about 1 million tonnes this year.
Another top analyst, James Fry, posted a more bullish view on biodiesel appetite, saying record high stocks that narrowed Brent crude's premium to palm oil have encouraged much greater use of the edible oil as fuel in local and overseas markets.
"If I were Petronas or Pertamina today, I would be rushing to buy local CPO (crude palm oil) to upgrade into biodiesel for blending with diesel, so as to hold down the costs of supplying motorists with their diesel fuel," said Fry, adding that the higher demand would help stocks decline and push prices to 2,625 ringgit by mid-year.
Analysts, traders and industry officials surveyed by Reuters at the conference saw average palm oil prices this year declining almost 18 percent to 2,420 ringgit from last year's 2,958 ringgit.
TAXING ISSUES
Tax changes in major producers and consumers that could add more uncertainty to the palm market were also a hot topic at the conference this year.
"Another big unknown is the way Malaysian export taxes will affect Europe's CPO premium over Brent," said Fry, who is the chairman of commodities consultancy LMC International.
Malaysia in October approved a plan to cut crude palm oil export taxes and is setting the tariff on a monthly basis, as it tries to claw back market share from rival Indonesia.
The export tax for March rose to 4.5 percent from zero percent in January and February.
Analysts were also touting a possible hike in the Indian import tax aimed at curbing the country's edible oil purchases that have pushed stocks to a record-high.
"I expect that by August to September 2013, the import duty on unrefined oil will be further hiked to 20 percent and to 27.5 percent on refined oil," Mistry said.
The country currently imposes a 2.5 percent import duty on crude edible oil and 7.5 percent on refined products.
