25/09/2012 (The Star) - At the GlobalOil conference in India over the weekend, famed palm oil forecaster Dorab Mistry reiterated his warning in July that crude palm oil (CPO) price was indeed heading south with a 50% chance that Malaysia's CPO futures would drop to RM2,300 per tonne in the final quarter.

His view was also shared by another expert Dr James Fry of LMC International who predicted an even lower CPO price of RM2,285 per tonne by year-end if the Brent crude oil dropped to US$80 per barrel from US$111 per barrel.

The general consensus now is that CPO price average can be lower at RM2,500 to RM2,600 per tonne this year which is a far cry from last year's average of RM3,247 per tonne.

Hence, one cannot simply dismiss these predictions given the fact that CPO has, so far, fallen by 18% this year due to bearish fundamentals.

Furthermore, the possibility for CPO being traded below RM2,500 is also high - no thanks to the current high palm oil stocks and increasing production level that continues to put pressure on prices.

To make matters worse, Dorab predicted that palm oil stocks in Malaysia would hit three million tonnes by early next year, surpassing the two million tonnes benchmark that normally would send the Government and industry players scrambling for ways to reduce stocks.

When palm oil inventory breached two million tonnes in 2008, CPO prices went down to between RM1,500 and RM1,800 per tonne.

In 2001, Malaysia had to burn CPO as industrial fuel to fire up Tenaga Nasional Bhd's power plants to ease the country's bloating palm oil stocks.

The ambitious plan at that time was to burn between 500,000 and one million tonnes of CPO a year to reduce stocks to a healthier level of 1.2 million tonnes and prop up prices.

While the current price of CPO may have fallen to the lowest in almost a year, some quarters opine that there is still hope for CPO price to climb back to a comfortable level following the current big price discount between CPO and its close rival soybean oil by about US$300 per tonne.

With CPO being an alternative oil to soybean oil, this will make the “cheaper” CPO more attractive to purchase by price-sensitive importing countries such as China and India.

According to data tracked by Bloomberg, the price gap between the two vegetable oils had widened 4.9% to US$307.92 a tonne yesterday. The record is at US$493.76 in August 2008.

This is a big gap considering the traditional CPO price discount to soybean oil is about US$150 to US$200 per tonne.

Thomas Mielke, the editor of Oil World had said recently that it was possible that the deep discount could favour palm oil and therefore push up demand.

While the big price discount between the two vegetable oils may not be sustainable, the world demand will definitely shift to the more effectively-priced palm oil.