Palm oil set to plunge 20% by September, top analyst predicts

Inventories in top exporter Indonesia have swollen to 10 million tonnes and will continue to increase in August. PHOTO: EPA-EFE

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

Inventories in top exporter Indonesia have swollen to 10 million tonnes and will continue to increase in August because of high production, before stabilising at around 9 to 10 million tonnes in September, Mr Mistry, director at Godrej International, said in an interview on Tuesday (July 19).

"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 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. The country 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 companies 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 on 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 is another six to eight months of "pain" in Indonesia before stockpiles ease to normal levels of 5 to 6 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.

Other comments from Mr Mistry: Stockpiles in Malaysia may rise to over 2 million tonnes by end-August, before climbing as high as 3 million tonnes by December or January. Demand has been "destroyed by extremely high prices".

Demand will also be hurt as the world enters a "shallow recession".

Indian import growth may be flat as additional incentives for imports are unlikely.

China's demand will also be flat as the No. 2 importer faces a slowdown in economic growth.

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