10/09/2012 (The Sun Daily) - Several recent articles suggest boom times for a wide range of commodities may be over. Prices of cotton, iron ore, coal and rubber have tumbled and the likelihood of a recovery in the short-term is dim.

While palm oil's long-term prospects are undoubtedly glistening, is the golden crop in Malaysia also at risk of losing its lustre in the short term?

This is an important issue for policymakers. Last year, palm oil contributed RM60.4 billion in foreign exchange receipts, making it the country's second-largest export earner, ahead of liquid natural gas and oil.

A Wall Street Journal article last Wednesday said Australian mining giants like BHP Billiton, Fortescue Metals and Rio Tinto are cutting spending and deferring billion-dollar expansion plans as the outlook for prices deteriorate.

Among commodities, the most volatile has been cotton. Tumbling from last year's peak of US$2.197 (RM6.836) a pound to a 31-month low of 64.61 cents on June 4 this year, cotton is expected to end the year at 67.87 cents, estimates compiled by Bloomberg suggest.

Cotton's roller coaster is because supply is expected to exceed demand for a third consecutive year, boosting stockpiles by 10% to 74.67 million 480-pound bales in August, estimates by the US Department of Agriculture show.

This impending glut has resulted in a record number of counter parties breaking their contracts. Last year, a record 242 arbitration cases were filed with the International Cotton Association (ICA) compared with just 73 cases in 2010. To date, 175 cases have been filed and US$317 million awarded by ICA, a more than four-fold jump from US$76.7 million for the whole of last year, another Wall Street article said.

Another example is iron ore. Last Tuesday, iron ore fell to US$86.90 a dry metric tonne, its lowest level since October 2009, and well below the US$135 reached in early July this year, according to The Steel Index.

Meanwhile, rubber appears to have lost its bounce. After plummeting to a low of 394 sen/kg on Dec 12, 2008, rubber jumped to a high of 1721.50 sen/kg on Feb 17, 2011. Since then, prices have slumped and rubber could trade between 780 and 795 sen/kg next week.

Some may argue demand for industrial commodities has been hammered by a triple conjunction of events – the two-year eurozone debt crisis, an anaemic US economy and the economic slowdown in China.

Admittedly, food crops have proven to be more resilient than industrial commodities. However, this doesn't explain one intriguing development – the divergent price performance of palm oil and its main competitor, soybean oil.

The worst ever drought in the US this year since 1936, caused soybean prices to skyrocket by a stunning 44%. In contrast, benchmark palm oil has fallen by 8.2% this year – widening palm oil's discount to soybean oil to US$332 a tonne, the largest gap since 2008, a Bloomberg article notes.

Dorab Mistry, a London-based director of Godrej International and trader in vegetable oils for more than three decades, offers one reason for this disparate price performance. The big story of 2012 is Indonesia's stockpiles, he says. Until recently, most analysts believed Indonesia hardly kept palm oil stocks and that Malaysia's inventory was much bigger, he said.

"Normal stocks of palm products in Indonesia in the last two years have been of the order of 3.5 to 4 million tonnes as against the normal conventional guesstimate of 1.5 to 2 million tonnes," Mistry said. Official data on Indonesia's output and stocks is not available.

"These hidden or hitherto ignored palm oil stocks in Indonesia are the key reason for the dismal performance of palm oil," he said.

Median estimates by analysts and plantation companies in a Bloomberg survey suggest palm oil inventory in Malaysia rose to an 11-month high of 2.14 million tonnes in August from 2 million tonnes in July.

Mistry estimates Malaysia's production of palm oil this year could total 18.2 million tonnes, significantly lower than his estimated Indonesian output of 27 million tonnes.

Palm oil prices will be restrained by high stockpiles, slower economic growth and rising output, Mistry forecasts. His view of continuing weakness in palm oil is shared by an earlier HSBC report. Demand for palm oil will remain soft due to weak growth expectations in major buyers – China, India and Europe, the report says.

"Unlike consensus, we believe negative price momentum will prevail going forward," the HSBC report said.

Apart from lower price, Malaysia could also be affected by Indonesia's decision to slash its tax on palm oil exports from 15% in August to 13.5% this month.

However, the critical challenge for Malaysia is to increase yields significantly without triggering a parallel rise in costs. Will the forthcoming Budget 2013 help plantation companies meet this challenge?