23/06/2011 (Agrimoney.com) - Anglo-Eastern Plantations stated two reasons for faith in palm oil prices even as they fell 1.3% to close at their lowest since November, weakened by a continuing uptick in output - including the company itself.  

The London-listed group, which operates in Indonesia, said that the palm oil market should gain "near-term support" from high oil prices. Palm oil is a major feedstock for biodiesel plants.

Palm prices would also be supported by their "widening discount" to soyoil, the rival vegetable oil, Anglo-Eastern said.

Palm oil's discount, which averaged $0.05 a pound in the first quarter of the year, has expanded to about twice that, comparing Kuala Lumpur prices of the commodity with Chicago soyoil.

Prices fall

However, the comments came as palm oil fell to 3,178 ringgit a tonne in Kuala Lumpur for September delivery, the lowest close for a spot contract for nearly seven months, and weakened by expectations of a continued rise in output in both Indonesia and Malaysia, the top two producing countries.

Malaysia's output has grown 4% so far this year, compared with 1% expansion in the first five months of 2010, helped by weather improvements following a series of agronomic and logistical setbacks blamed on the El Nino, and then La Nina, patterns.

In Indonesia, Anglo-Eastern's own palm oil output jumped by 25% to 92,500 tonnes during the same period, due to better palm fruit yields at its own plantations and a rise in purchases from external growers.

Indeed, a series of analysts have warned over palm oil prices, citing the production rise.

'Additional downward pressure'

On Tuesday, Oil World forecast that increased output would press palm oil prices to an average of $950 a tonne in Rotterdam during the last quarter of the year, from $1,185 a tonne on Monday, for July delivery.

The weakness would extend into next year, weighed by output set to increase "sharply", by 2.8m tonnes in the year to September 2012

"This, plus higher world palm oil stocks, could result in additional downward pressure on palm oil prices," Oil World said.

"We expect palm oil to widen its price discount against soyoil and rape oil in the months ahead."

'Tight availability'

Last week, Rabobank trimmed short-term expectations for palm futures, citing the production rise, but forecast a revival into 2012 as weaker prices stimulated demand.

"The tight availability across the entire oilseed complex will cause end-users to increase palm oil use and likely maintain palm oil's discount to soyoil at less than $0.10 a pound," the bank said.

Barclays Capital analyst Xin Yi Chen forecast similar dynamics, saying "only weather-related palm oil production disruption could boost price upside potential" for now.

Anglo-Eastern shares stood 1.1% lower at 741.5p in midday trade in London.