Kuala Lumpur, Sept 10 - A surprise drop in Malaysian crude palm oil stocks in August is unlikely to signal a reversal from recent sharp price declines as oversupply will remain at least until the end of the year.
Data released on Wednesday by the Malaysian Palm Oil Board showed that stocks fell 6.5 percent to 1,848,130 tonnes in August from a revised 1,977,397 tonnes in July. Market expectations in a Reuters poll had been for a 1.2 percent rise in stocks.
A glut of palm oil, combined with falling commodities prices as the global economy slows, has caused the price of palm oil to drop to 2,350 Malaysian ringgit ($684.5) a tonne for November delivery from 4,486 ringgit per tonne at its peak in March.
"The high cycle of palm production shows signs of continuing well into October and even as far as November," Mistry said. "I also believe that in the first half of November, the combined stocks of Malaysia and Indonesia will exceed a tank-bursting figure of 5 million tonnes," industry analyst Dorab Mistry told an industry conference in Singapore on Wednesday.
Mistry believes that palm oil output in Indonesia, the world's largest producer, will rise 16 percent this year to 20 million tonnes while in Malaysia output will rise to 18 million tonnes this year, up from 15.8 million tonnes in 2007.
The two countries account for more that 80 percent of world output of palm oil, and Mistry said he sees prices falling to around 2,200 ringgit a tonne.
As well as overproduction, prices of palm oil have been hit by falling crude oil prices which have dropped to around $100 a barrel from a peak of $150 and further price falls for oil could hit palm.
BIODIESEL ECONOMICS
Falling palm prices could, however, stimulate demand for its use in biodiesel plants. M.R. Chandran, an independent industry analyst and former head of the Malaysian Palm Oil Council, said the economics were improving thanks to new technoolgy.
"If you take away 3 million tonnes (of supply) by the end of next year, then of course you will see a little bit of a price upswing," Chandran told Reuters.
Indonesia's state oil firm, Pertamina, uses a 2.5 percent blend of biofuel in diesel fuel, and plans to increase that figure to 5 percent, depending on the biofuel price.
Indonesia is also home to Asia's largest biodiesel plant, the 1.05 million tonne-per-year Peilintung plant owned by Singapore-listed palm producer Wilmar International
An 800,000 tonne capacity plant in Singapore to be built by Finnish refiner Neste Oil Corp is due to come onstream in 2010, and, combined with smaller plants, could see new demand to soak up excess capacity, Chandran said.
A Reuters survey at the start of this year showed at least 1 million tonnes of biodiesel capacity plants were sitting idle in Asia.
In Malaysia, just seven plants are running likely with output of 100,000 tonnes this year, compared with licences granted three years ago for 10 million tonnes of output.
The main push for biodiesel has come from mandates in Europe and the U.S. to substitute it for increasingly expensive crude oil, boosting demand.
Chandran said new technologies were making palm more competitive.
"If you look at the new technology and ... it's a volume game like the old refining sector, you are looking at about 2,000 (ringgit per tonne), even at the levels of 2,500 you are making money," he said.
"Even 2,600, even at 2,700 Malaysian ringgit you still make about a $50-$60 a tonne margin," he said.