Palm Oil Rising on Ringgit Weakness, Mistry Says

MUMBAI: (Bloomberg) -- Palm oil may extend its bull market climb should the Malaysian currency retreat further against the dollar, according to Dorab Mistry, director at Godrej Industries Ltd.

Palm oil touched RM2,460 per tonne tonne earlier this week, the highest since June 2014. As the ringgit dropped against the greenback, this made the world’s most popular edible oil cheaper for international buyers. 

The commodity bounced into a bull market last week amid concerns over the impact of haze on the world’s biggest producing region and a strengthening El Nino.

Benchmark crude palm oil futures will probably trade at the upper end of a RM2,100-RM2,400 a tonne range if the Malaysian currency weakens to RM4.50 to one US dollar, Mistry told the Globoil conference in Mumbai on Wednesday. 

Prices could then touch RM2,500 ringgit a tonne, he said. The ringgit is currently trading at about RM4.44 to the dollar after weakening to RM4.48 on Tuesday, the weakest since 1998.

“It is possible for CPO to go to RM2,500 per tonne just for a short time,” according to Mistry, who has traded cooking oils for more than three decades. 

His CPO price forecast assumes Brent crude will trade between US$45 and US$60 a barrel. Still, “such a level is not sustainable unless mineral oil prices rise significantly,” he said.

Production may decline in the first and second quarters of 2016 as the moisture deficit from El Nino and a low yielding period from January starts to affect crops, Mistry said. His estimate of global palm output to rise by 2.5 million tonnes between October and September 2016 takes into account damage that may be caused by El Nino.

The plunge in the ringgit, Asia’s worst-performing currency this year, combined with growing concerns over El Nino’s impact on production in Malaysia and Indonesia, helped pull palm oil out of the bear market it entered just last month, when the tropical oil hit a 6-1/2 year low of RM1,863.

Vegetable oil prices may struggle to rally if crude oil prices stay weak, Mistry said. Cheap crude makes edible oils, including palm oil, a less attractive option for biofuel feedstock. Palm oil was trading at a premium of US$80 a tonne to gas oil on Wednesday versus an average of US$32 over the past year, Bloomberg data show.

“If crude oil prices stay in the range of US$35 to US$50 per barrel, then the loss of biodiesel demand will be very difficult to make up and will cast a long shadow over vegetable oil prices," Mistry said. He reduced his estimates for biodiesel demand to a best-case position of a gain of 1 million tons, from 1.5 million tonnes forecast last month.

It’s too early to gauge how successful Indonesia will be collecting palm oil export levies to fund its biodiesel program, Mistry said.
“Indonesia does not have a good reliable track record of implementing new policy initiatives,” he said, adding that the 15 per cent mandatory blending rate appears to be “too high and against the advice of every motor manufacturer.”

Global edible oil supply is forecast to rise by 4.6 million tonnes in 2015-16, while demand may increase by 4.5 million tonnes - a balance which Mistry warns could change very quickly if there’s a “production problem in some part of the world or Indonesia suddenly performs to expectation on biodiesel.”

Imports by India, the world’s biggest edible oil buyer, will rise to 15.1 million tonnes in the October to September 2016 marketing year from 14.1 million tonnes this year, with shipments of palm seen rising to 9.6 million tonnes from 8.7 million tonnes, and soybean oil to 3.6 million tonnes from 3 million tonnes.

El Nino, which bakes parts of Southeast Asia but brings rain to South America where soy is grown, may pave the way for more plantings and bumper crops between March to May next year, Mistry said. Bigger supplies of soybeans for crushing into soy oil may lower prices of the rival edible oil.

“I regard soya oil as the most competitive and ‘must own’ oil today,” Mistry said, adding that India’s appetite for soy oil will grow stronger. “Soya oil will this year win market share from all other oils.” 

He sees soybean prices remaining below $9 a bushel, and Chicago Board of Trade soy oil futures range bound between 26-28 cents a pound. Prices may climb to 32 cents if the U.S. Environmental Protection Agency raises biodiesel mandates, he said.