08/06/2012 (Business Standard) - The price of crude palm oil (CPO) is likely to decline by 10 per cent from the current level, owing to macroeconomic concerns, according to Dorab Mistry, director of London-based Godrej International.

The demand for CPO, ahead of Ramzan (starting July 19), has so far not come up to industry’s expectations. In case the United States does not announce a third round of quantitative easing (QE3), CPO price might fall to between ringgit 2,700-2,800 a tonne, he noted on Thursday. This level, however, would stimulate demand once again to pull the price up to around ringgit 3,300 a tonne, Mistry told delegates at the Malaysia-India Palm Oil Trade Fair & Seminar, 2012.

The CPO price has, since April 2, declined 14 per cent from the level of ringgit 3,483 a tonne. Reason: reduced demand from western countries. Dwindling economic sentiment in European countries has hit CPO demand for blending with local vegetable oils. Its appeal as a green fuel has also been hit badly due to a dramatic fall in crude oil prices. India would be in an advantageous position if price declines from this level.

The last eight weeks have been tumultuous for the market. BMD (Bursa Malaysia Derivatives) futures peaked at 3,628 ringgits on April 10, and then fell back almost 600 ringgits. Globally, the scenario on commodities has darkened considerably. The main catalyst for palm oil prices, has been a fall in crude oil prices — by almost $20 per barrel. The logic has been that biodiesel demand is the swing factor and as crude oil falls, biodiesel becomes uncompetitive. There are also reservations in traders’ minds about expansion of food demand during 2012. Commodity prices have declined as the International Monetary Fund has cut its global growth forecast.

A repeat of the global economic slowdown to the level of 2008, Mistry said, could trigger a collapse in CPO futures to even ringgit 2,200 a tonne. Indonesian export duty on CPO would become zero at that level, tempting some to sell the market down. The likelihood of such a collapse, he said, was “no more than 20 per cent at present,” but traders should be mindful of it.

Lower-than-expected employment data in the US has led to renewed expectation of a third round of quantitative easing (QE3). The US generated only 54,000 jobs against expectations of 150,000 new jobs in May. Analysts also expect China to announce a stimulus to boost its economy. In such a scenario, CPO would get some support to touch ringgit 3,500 a tonne level — but, certainly not to the level of ringgit 4,000 a tonne as expected in March.

There is a strong chance of an El Nino phenomenon rearing its head, beginning August. The initial effect of this hot and dry weather would be an acceleration of the ripening of fresh fruit bunches, resulting in higher CPO production in the first few months. It would, however, affect sentiment in the longer term.

Now, a decline in vegetable oil prices in the last two months has renewed Indian government’s threat of tariff revision. The replacement of RBD Olein imports into India with larger imports of CPO will also have an impact on the price of Stearine and PFAD. India may begin to export RBD Stearine, Mistry said, adding there would be ample availability of raw material for India’s soap and oleochemicals industry.

As for India’s vegetable oil import, it is estimated to set a new record this year — at 9.5 million tonnes. India’s overall edible oil production from domestic sources is expected to decline this year to 6.7 mt as against 7.2 mt last year.