27/02/2008 (The Hindu Business Line) - Will the crude palm oil (CPO) price bubble burst sooner than many think? The market has been rising relentlessly in recent times, and has been racing towards the magical 4,000 Malaysian ringgits (MYR) a tonne in the wake of rising crude prices, weak dollar and robust demand.
Change in fundamentals
Three out of four expert speakers who presented their price outlook on palm oil for 2008 at the Bursa Malaysia organised meeting on Wednesday did not share the optimism of many of a super spike; but argued that the market was poised for a correction, given anticipated changes in the market fundamentals.
According to Mr Dorab Mistry, the London-based Director of Godrej International Ltd, CPO futures will cross MYR 4,000 this summer. If weather turned unfriendly, the rates could rise even higher to MYR 4,500, he asserted.
As for soyabean oil, he forecast $1,500 a tonne during May/June/July under normal weather conditions; while itcan go to $1,800 a tonne under adverse weather conditions. Soyabean can potentially rise to $16 a bushel, he asserted.
Mr Mistry based his outlook on continuing tightness in demand-supply fundamentals. Anticipated incremental demand and incremental supply during 2008 would keep the market in tight balance; and any disruption to supply could potentially lead to price spike, according to the expert.
Reviewing the world oilseeds and oils scenario, and commenting on the reaction of the global vegetable oil and palm oil markets on the challenges from the energy sector, Mr Thomas Mielke, Editor of Hamburg-based Oil World, said while the market had limited downside potential, the case for a further large price increase was weakening.
Terming the bio-fuels sector as politically driven, Mr Mielke showed production capacities continue to expand ahead of actual bio-diesel production. World bio-diesel capacity is expected to expand to 33 million tonnes in 2008 versus anticipated actual production of 11.3 million tonnes. In 2007, capacity was 23 million tonnes and production 8.9 million tonnes (12.0 million tonnes and 7.0 million tonnes respectively in 2006), he informed the audience.
If world oilseed output rises an anticipated in 2008-09, we can see a change in market fundamentals and sentiment, he asserted. He forecast soyabean output to rise by 25 million tonnes, rapeseed by 3.5 million tonnes and sunseed by 3.0 million tonnes.
In his presentation on the lessons we can learn from past bull markets, Dr James Fry of LMC International, pointed out that bio-diesel demand was weakening due to high feedstock prices; and that the industry will not survive without governmental support. The question is: When will the support be removed? he asked.
Asserting that inflation will ration demand, Dr Fry said past price behaviour would suggest that the market would soon move to a situation where crude market and CPO stocks will dictate prices. Additionally, China may slow buying in April/May. Financial market crisis and fear of recession in the US added to the uncertainty.
Beyond April, CPO prices may turn down, he said adding if crude mineral oil stayed stable at $92-94 a barrel, CPO prices may drop to 3,100-3,200 MYR a tonne. If Brent crude went to $80 a barrel (he sees this as a possibility), CPO may trade even lower than 2,900 MYR a tonne.
There was also warning that a price crash could lead to serious default.