Palm oil prices sizeably undervalued, says Mielke

Mumbai, INDIA: (Bloomberg) PALM oil prices are "sizeably undervalued" in comparison with soyaoil and the discount is unlikely to be sustained as lower prices will prompt importers to buy more palm oil, a top world oils analyst said yesterday.

"Palm oil is offered at discounts of more than US$250 (per tonne) under soyabean oil. I think this is not sustainable. We are going to see world import demand to shift to the more effectively priced palm oil," said Thomas Mielke, editor of Hamburg-based newsletter Oil World.

The increased demand will help the world's top two palm oil producers - Indonesia and Malaysia - raise exports and trim inventory that has been depressing palm oil prices, Mielke said in his video presentation to the Globoil India conference here.

On Friday, benchmark palm oil futures on Bursa Malaysia Derivatives lost 2 per cent to close at RM2,763 a tonne, after hitting an 11-month low of RM2,755 earlier in the day.

World production of palm oil is likely to rise to a record high of 54.4 million tonnes in 2013 from 51.6 million tonnes estimated for 2012, Mielke added. Output could rise to 78 million tonnes in 2020 as higher profitability is bringing in additional plantation, he said.

Global output of sunflower oil in the 2012/13 year starting from October 1 is likely to fall by 1.2 million tonnes, and that should give it a price premium over rival soyaoil in the second half of the year, Mielke said.

CBOT soyabean futures hit an all-time high of US$17.94-3/4 a bushel this month, but have since fallen nearly seven per cent as farmers in the US hastened harvesting of their new season crop. However, that crop is likely to be used up quickly due to higher prices and that will again create tight supplies, allowing prices to resume their rally, Mielke said, without giving any time frame.

"Soyabean prices will resume their rally, exceeding US$18 a bushel, probably rising to US$19 or US$20 or above if any problems occur in South America," he said. Sowing has been progressing in South America, where output was hit by a severe drought last year.

CBOT November soyabeans finished 0.2 per cent higher at US$16.21-3/4 a bushel on Friday.
However, Dorab Mistry, director at Godrej International Ltd, said palm oil, the world's most-used cooking oil, is poised to tumble to a two-year low as inventories surge in Indonesia and Malaysia, the biggest producers, and a global economic slowdown curbs demand.

Palm oil, used in everything from chocolate to detergent, has fallen 8.5 per cent this month as demand slowed from importers including China and the EU, and stockpiles surged because of a seasonal increase in production. Falling prices may reduce revenues for producers including Sime Darby Bhd and IOI Corp Bhd and help cap rises in global food costs.

"Demand for palm oil in particular, and for vegetable oils in general has been softer than expected in 2012," said Mistry, who has traded palm oil for over three decades. Demand was hurt by slower growth in the production of biofuels from vegetable oils and a slowdown in economic growth in the developing countries amid high prices, he said.

Futures have fallen 20 per cent since the end of March and are heading for a second straight quarterly decline on concern that a pick-up in production will drive stockpiles in Malaysia and Indonesia to records.

Stockpiles in Malaysia will continue to expand in October, November and December and may reach as high as three million tonnes by January, Mistry said.

Inventories in Indonesia have hovered between 3.5 million tonnes and four million tonnes since 2010 as against popular estimates of 1.5 million tonnes to two million tonnes, he said.