Palm oil prices to plunge 50%

Palm oil prices could fall by 46 percent next year due to oversupply and waning demand for biofuels, despite measures to cut production in Southeast Asia, a brokerage group has said.

CLSA Asia-Pacific Markets has slashed its forecast for palm oil prices by 46 percent in 2009 and 32 percent in 2010, from current levels of about RM1,455 per tonne.

In a report released last week, the brokerage said it expects the commodity to trade at RM1,000 per tonne next year and RM1,250 in 2010.

Prices of palm oil have plummeted by 68 percent since a March high of RM4,486 per tonne due to the financial crisis and the falling price of crude oil - which reduces demand for palm oil to supply the biodiesel industry.

Malaysia's palm oil inventory in October hit a record 2.1 million tonnes - a 14 percent increase from the previous year - due to a production surge and a slowdown in exports to China and the Netherlands.

CLSA said that the inventory build-up is much worse in Indonesia.

"The biofuels story is waning, providing less demand support. We are also sceptical about effectiveness of government initiatives to boost CPO (crude palm oil) prices," it said.

Malaysia and Indonesia, which account for 85 percent of global palm oil output, plan to replant old trees and mandate biodiesel use to cut supply and bolster prices.

However, Buddhika Piyasena from Fitch Ratings was less gloomy, saying that prices had "pretty much bottomed out" at current levels and that the risk of further losses was limited.

"We might see these levels continue in the US$450 (RM1,625) per tonne range for a while," Piyasena told AFP, noting that both the world's top producers, Indonesia and Malaysia, are implementing measures to push up prices.

Gov't Vehicles To Use Biofuel

Deputy commodities minister Kohilan Pillay said Malaysia aims to fell some 200,000 hectares of old palm oil trees and all government vehicles will start using biofuel in the next few months.

The replanting scheme will involve trees of more than 25 years old as the yield from these trees is low at about 17 tonnes per hectare annually.

Smallholders will be given a RM1,000 incentive by the government for each hectare replanted.

"A good price for CPO is at the RM2,000 range and this is what we are aiming for," he said.

Fitch's Piyasena said that if the measures to mandate the use of biofuel in both countries are fully implemented, it could absorb up to 1.0 million tonnes of palm oil.