KUALA LUMPUR (March 20 2003) : Malaysia's palm oil futures prices may fallsharply if war erupts in Iraq because of higher shipment charges affectingdemand, while the world's top producers are stepping up output, anIndonesian industry official said on Tuesday.

"If war happens, prices can fall to 1,300 ringgit ($342.11)," Tan SiauwLiang, vice president director of PT Smart Tbk, told Reuters on thesidelines of an edible oils conference.

At the close on Tuesday, the benchmark third month futures contract, June,closed three ringgit lower at 1,477 ($388.68) a tonne after trading as lowas 1,467 ringgit.

The market traded at 1,300 ringgit last October.

UN weapons inspectors pulled out of Iraq on Tuesday and US forces preparedto invade after President George W. Bush gave Saddam Hussein and his sons48 hours to flee the country.

Tan said palm oil consumers may trim their purchases because of prospectsof increased shipping costs.

"If war breaks out, shipments to Europe will be disrupted, soautomatically there will be an oversupply in Malaysia and Indonesia," saidTan, adding that the market would be depending on India and China toabsorb excess supplies.

"High stocks will depress prices," he said.

Increased output from the main palm oil producers, Malaysia and Indonesia,would also put downward pressure on prices, he said.

Malaysia, the world's largest producer, is expected to produce 12 milliontonnes of crude palm oil (CPO) in 2003, up from 11.91 million tonnes in2002.

Indonesia's CPO production was seen at 9.2-9.3 million tonnes this year,up from 8.82 million tonnes in 2002.

Tan said India's decision to leave edible oils import tariffs unchangedwhen it announced the 2003-04 budget in late February was not favourablefor the market as it would restrict demand.

India, the world's largest edible oil consumer, imports about 4.5 milliontonnes of it every year, almost half of what it consumes.

Palm oil accounts for nearly three million tonnes.

India levies a basic import duty of 85 percent on refined, bleached anddeodorised (RBD) palm olein, 65 percent on crude palm oil and 45 percenton soya oil.- Reuters