Palm oil price may drop 20% by Sept with supply surge: Analyst

KUALA LUMPUR • Palm oil, the world's most consumed cooking oil, may extend its slide, tumbling more than 20 per cent to RM3,000 (S$941) a tonne by September, driven by surging supplies in Indonesia, said veteran analyst Dorab Mistry yesterday.

Inventories in top exporter Indonesia have swollen to 10 million tonnes and will keep rising in August because of high production, before stabilising at about nine million to 10 million tonnes in September, said Mr Mistry, director of Godrej International.

"They are chock-a-block with palm oil," he told Bloomberg TV. "Barges, ships, everything is being used to store palm oil. Whatever is done by the government is too little and too late."

In May, Mr Mistry correctly predicted an earlier price slide, saying that Indonesia easing its export ban was only a matter of time. A further slump in palm oil may help ease global food inflation, which peaked in May-June, according to Mr Mistry, who has traded the oil for more than four decades.

Palm oil has been whipsawed by Indonesia's shifting export policy. Jakarta imposed a shipment ban in late April that was meant to cool surging costs of domestic cooking oil and curb food inflation.

But the halt had little impact on local prices and instead led to overflowing storage tanks. The ban was lifted three weeks later and replaced with a policy that requires producers to sell some output domestically, as well as an option for an accelerated programme that allows firms to pay a special tax to get additional export quotas.

"Indonesia will have to pay for the folly and the mistake of its government in imposing a ban on palm oil," Mr Mistry said, adding that the move was well-intentioned, but had unintended consequences. "When you do something catastrophic like that, you destroy demand, you destroy markets, you destroy the service industries."

Indonesia, which last Saturday said it will waive its export levy until the end of August, will have to extend that exemption even longer, according to Mr Mistry.

It should also abolish the domestic market obligation policy and remove export taxes to successfully boost exports and cut stockpiles.

Even so, there will be another six to eight months of "pain" in Indonesia before stockpiles ease to normal levels of five million to six million tonnes and prices stabilise, Mr Mistry said.

That means the outlook for palm oil remains bearish for now.

Benchmark futures have already slumped 45 per cent from a record close at end-April.

"This is just one step in the southward journey in palm oil," Mr Mistry said. Prices will not reach a bottom until there is a ceasefire in Ukraine and walled-up supplies of products like sunflower oil, wheat and corn come onto the market, he said, adding that prices could slump to RM2,500 to RM3,000 when the war ends.

Mr Mistry also said stockpiles in Malaysia may hit more than two million tonnes by end-August, before climbing as high as three million tonnes by December or January.

BLOOMBERG