Friday, October 17, 2008

Dorab Mistry Reckons That CPO May Have To Fall To MYR1,600 To Boost Demand

Here are some interesting commentary from famed analyst Dorab Mistry

  • Crude palm oil prices may have to fall to around MYR1,600 a metric ton and stay there for a sustained period of time to increase demand and clear surplus stocks, London-based vegetable oil analyst Dorab Mistry said Friday.

    If crude oil is around $80 a barrel, CPO prices will have to fall to MYR1,600/ton to clear excess inventory, Mistry said at an international vegetable oil conference in Nanjing, China.

    Soyoil prices may fall further to maintain market share and avoid a huge stock buildup in South America, he said.

    In line with Mistry's forecast last month, CPO prices fell below MYR2,200/ton, moving in tandem with crude oil, which moved below $80 a barrel.

    Friday, the benchmark January CPO futures contract on Malaysia's derivatives exchange ended MYR16 lower at MYR1,635/ton.

    Mistry said fresh strong demand is unlikely to be created if CPO prices fall to MYR1,600/ton for only a single session and then rebound toward MYR2,000/ton once again.

    He said if crude oil is trading below $80 a barrel, palm oil needs to demonstrate price competitiveness by trading at lower levels.

    Biofuel producers will insist on long-term low and workable prices, Mistry said.

    "For palm oil to capture demand from biofuel producers, prices need to be low for at least eight to 10 weeks," he said.

    Lower CPO prices for one day wouldn't reduce high inventories for a longer period of time.

    Mistry said that by the first half of November, total palm oil stocks in Indonesia and Malaysia may exceed a record 5 million tons.

    He said due to the slowdown in the global economy, growth in demand for vegetable oils may turn out to be slower than current expectations.

    "Consumers will tend to buy hand-to-mouth until the economy turns for the better," said Mistry.

    He said provisional indications are that demand for palm oil for making food may rise by 4.0 million tons in the marketing year to September 2009.

    "But in the course of time, I may revise downward my estimate of expansion of food demand to 3 million tons."

    He said this will depend on whether large, populous countries slip into recession or show only small growth.

    A biodiesel producer will not start operations unless he has locked in supplies for at least one year at low prices, but traders are unwilling to sell large volumes, at current prices, well in advance.

    This is a stumbling block for generation of fresh demand.

    Favorable Weather, High Supply

    Mistry said in the last month, prospects for soybean production in the U.S. and rapeseed in Canada have improved.

    There have also been beneficial rains for soybeans in Argentina and Matto Grosso province in Brazil. Australia is expecting a large rapeseed crop.

    Malaysia's palm oil production is likely to be higher in October.

    In times of economic difficulties, farmers also tend to grow more rather than less of an agricultural crop, he noted.

    He said in the 2007-08 marketing year, incremental supply exceeded incremental demand by almost 1.5 million tons, and the bulk of the surplus was in the second half of the year.

    Mistry said the rate of growth in palm oil output will slow down in 2008-09 and will be mostly in Indonesia, with production likely to be unchanged on year in Malaysia.

    Global palm oil production may rise by 2.5 million tons in 2008-09, compared with incremental output of 4.5 million tons last marketing year.

    But a major rise by 1.6 million tons and 1.2 million tons is likely in global production of sunflower oil and rapeseed oil in 2008-09.