Palm oil likely to reach $1,000 a tonne next year

Palm oil may rise as high as $1,000 a tonne next year because of increasing demand and a shortfall in supplies of vegetable oils, according to Derom Bangun, the head of the Indonesian Palm Oil Association.

Prices may average $900 a tonne, Bangun said today at a conference in Bali. Palm oil futures climbed to a record 3,000 ringgit ($901) a tonne yesterday on the Malaysian Derivatives Exchange, which trades the global benchmark.

Vegetable oils are increasingly used to make biodiesel as crude oil prices more than tripled to a record in five years. US farmers have switched to corn to meet demand for ethanol, pushing soybean acreage to a 12-year low.

Price gains are benefiting IOI Corp, Malaysia's largest palm oil producer by value, and PT Astra Agro Lestari, Indonesia's biggest publicly traded agriculture company.

"The world needs crude palm oil like never before," Dorab Mistry, a director at Godrej International, one of India's largest importers of the commodity, said at the same conference.

"World inventory of soybean, sunflower, rapeseed and cottonseed oils is down to two weeks. It shows how much we rely on palm oil as a substitute to plug the gap."

The tropical oil will trade above 3,000 ringgit a tonne in a few months, he said. Mistry, who has traded vegetable oils since 1976, forecast on September 23 that palm oil would exceed that price within a year.

$100 BET
China and India, the biggest vegetable oil buyers, import palm oil to fill shortages in supplies of soybean, groundnut and canola oils. China purchased 3.9 million tonnes of palm oil from January to September, 1 per cent more from a year earlier, while India imported 2.62 million tonnes, up 32 per cent from a year ago.

Prices may reach 3,400 ringgit a tonne in six months if crude oil exceeds $100 a barrel, said James Fry, managing director at researcher LMC International, at the same conference. Palm oil may "settle" at 3,000 ringgit if crude fails to rise above the $100 mark, he said.

Palm oil often moves in the same direction as prices of crude oil, which rose above $98 a barrel yesterday in New York. Crude prices gained 21 per cent in the past month as the dollar fell, storms cut Mexican output, tensions between Turkey and Iraq rose, and investors increased bets oil would reach $100.

"Only a correction in crude oil prices will bring palm oil lower," Chris de Lavigne, global vice president at consultant Frost & Sullivan, said. "Moving into the first quarter of 2008, we could see crude oil as high as $120 a barrel, and crude palm oil will go to $1,000 a tonne."

Biodiesel mandate
While biofuel prices are dependent on crude oil to a large extent, "mandated usage" will ensure demand for palm oil stays high, Fry said, referring to governments setting blending ratios of vegetable oils and traditional fuels to cut emissions.

"With the mandate to blend vegetable oils with fossil fuel, the price (of palm oil) is no longer an issue," he said. "You just have to comply with the mandate."

Biofuel is added to fossil fuels, replacing between 5 and 20 per cent of the content. The US, Brazil, the EU and Malaysia are among those with mandated biofuel blend targets using palm, soybean and rapeseed oils.

As much as 34 million tonnes of palm oil would be required annually for biofuel alone if the commodity replaces 5 per cent of world diesel demand of 680 million tonnes, Fry said.

IOI shares have more than doubled this year on the Malaysia stock exchange, while Astra Agro stock has climbed 88 per cent in Jakarta.