27/08/2008 (Bloomberg) - Palm oil prices have reached a ``bottom'' and will be supported by declining supplies and increasing demand for biodiesel, Derom Bangun, chairman of the Indonesia Palm Oil Association, said.

Prices of the cooking oil reached $825 a ton on a cost-and- freight basis in the port of Rotterdam about 10 days ago, or about $750 a ton in Malaysia, Bangun said in an interview with Bloomberg Television today.

Palm oil, used in cooking and as an alternative fuel, slumped 7.9 percent this week as supplies from Indonesia and Malaysia outpaced demand. The price has plunged 18 percent this year. Indonesia, the biggest grower, may produce more than 19 million tons this year and Malaysia more than 17.4 million tons, Dorab Mistry, director at Godrej International Ltd., has said.

``Supply will get tight in the long term and prices of palm oil may rise in the fourth quarter,'' Miang Chuen Koh, analyst at Morgan Stanley Asia (Singapore) Pte., said by phone today. ``Demand will pick up from the food side as well as biodiesel.''

The palm oil price for November delivery jumped as much as 4.7 percent in Kuala Lumpur today to 2,523 ringgit ($748) a metric ton and traded at 2,500 ringgit at 12:30 p.m. local time.

``Recently prices dropped from over $1,200 a ton in Rotterdam to $825,'' Bangun said. ``Last week prices rebounded to $880-$900 although they fell again yesterday to $860. Prices will remain there and are not going further down.''

Production Drop
Output will decline after the peak production season in Malaysia and Indonesia ends in September, Bangun said.

``What happens now is a kind of temporary oversupply'' as traders and processors built up excessive inventory at high prices without noticing weakening demand, he said. ``That's why for some time they don't buy any more palm oil, causing prices to drop to such a low level.''

The Indonesia Palm Oil Association is an organization of crude palm oil producers, consisting of state-owned and non- state plantations, foreign-owned plantations and cooperatives of oil-palm growers.

Malaysia is trying to ``ensure there is no oversupply,'' Plantation Industries and Commodities Minister Peter Chin Fah Kui said in an interview yesterday. ``We're encouraging the industry to clear their stocks and asking companies not to import'' crude palm oil from other countries like Indonesia.

The country's stockpiles reached a record 2.04 million tons in June before declining to 1.98 million tons in July, according to the Malaysian Palm Oil Board.

More Biodiesel
``Making biofuel from palm oil has become economically viable now,'' Alvin Tai, analyst at OSK Research Bhd., said by phone from Kuala Lumpur.

Biodiesel manufacturers can break even with crude oil priced at the current level and palm oil at 2,900 ringgit, Tai said. ``So you can see they are having quite good margins now'' with palm oil trading below 2,500 ringgit a ton.

Golden Agri-Resources Ltd., a unit of Indonesia's largest oil-palm grower, Sinar Mas Group, is looking at a possible mandate from the government to use the product in blended fuels, Chairman and Chief Executive Officer Franky Widjaja said Aug. 12. The company doesn't make biodiesel yet.

``If the Indonesian government were to mandate for a 3 percent compulsory blend of biodiesel, that's equivalent to 550,000 tons of palm oil demand,'' Widjaja said. ``If the government were to mandate 5 percent, that's equivalent to 900,000 tons.''