Crude palm oil (CPO) futures on Bursa Malaysia plunged below the RM2,300 mark yesterday with analysts expecting prices to bottom out at this level before rebounding in one or two months time, amid signs of the global economic slowdown hurting demand.
The three-month benchmark December contract fell 8.4% to close at RM2,255 per tonne, its biggest single day drop since July 2008. It reached an intra-day low of RM2,250 per tonne with a turnover of 28,743 lots.
In July, famed palm oil forecaster Dorab Mistry, director at Godrej International warned that crude palm oil (CPO) price was indeed heading south with a 50% chance that Malaysia's CPO futures would drop to RM2,300 per tonne in the final quarter.
“Besides the usual reasons to explain the CPO price weakness which include high stock levels, high output season and weak bio-diesel demand, we have incremental news flow that is adding to the weakness namely weaker crude oil prices and better weather conditions in Brazil which will improve soybean supply from second quarter 2013 onwards,” said JP Morgan Malaysia in a note to clients. It said CPO discount to soy-oil is now at US$310 per metric tonne versus a historical mean of US$160 per metric tonne.
“We do not expect further weakness in CPO prices from here. Based on our bio-diesel breakeven calculation, spot CPO of RM2,392 per metric tonne implies a breakeven bio-diesel price of US$75 per barrel which is below spot crude oil price of US$112 per barrel,” it said.
It said CPO prices would recover when current high stock level starts to clear towards the end of 2012 or early 2013, as the market entered the low output season in one or two months' time. “This coincides with the extreme tightness in soybean up to February 2013.”
According to Oil World, the substitution demand has not kicked in materially as China is still importing more soybean in anticipation of higher prices as the upcoming supply tightness worsens.
However, once the US soybean stock levels get significantly drawn down, CPO prices will likely recover before end first quarter 2013 to narrow the CPO to soy-oil price discount gap before CPO price gets weaker from second quarter 2013 onwards.
Kenanga Research plantation analyst Alan Lim Seong Chun said generally the month of September and October was generally the high output period, and coupled with weaker exports, the factors had resulted in a sell-down in CPO futures with traders expecting higher inventories in the near term.
“I think we need to wait and see right now, as once we clear this two months, CPO prices are expected to rebound. The CPO discount to soy-oil is now at very significant levels of about US$350, compared with the average of US$150,” he said.
He said the next set of data to look out for would be the release of the Malaysian Palm Oil Board (MPOB) monthly statistic data on Oct 10, which would set the tone for prices in the near term.
According to MPOB statistics last month, local palm oil inventory rose to its highest level year-to-date in August at 2.11 million tonnes compared with 1.99 million tonnes a month earlier, reflecting a 5.81% increase.
Mistry had also reportedly said stockpiles in Malaysia would continue to expand in October, November and December and might reach a record three million tonnes by January. CIMB Research analyst Ivy Ng Lee Fang, in a recent sector report said the last peak for CPO inventory in Malaysia was in November 2008 when palm oil stocks built up to 2.27 million tonnes due to the global financial crisis and CPO price fell to a low of RM1,549 per tonne, driven partly by the sharp drop in crude oil price to a low of US$54.70 per barrel.