12/3/07 (Bloomberg News) - The price of palm oil, the world's most traded vegetable oil, will surge this year as demand increases, the impact of drought curbs supply in Southeast Asia and more governments mandate the use of alternative fuels.

The commodity will average $564 a metric ton in 2007, 27 percent higher than last year's figure, according to the median forecast of eight analysts polled by Bloomberg News. The average price gained 11 percent in 2006 compared with the year before.

Sales of palm oil, 85 percent of which is grown in estates in Malaysia and Indonesia, have been surging in China and India, the world's two most populous countries. The oil is used in foods such as chocolate and, increasingly, as an additive that is blended with conventional fuels, including diesel.

``Demand from India is rising after import tariffs were cut,'' Robert Adair, an analyst with CIMB-GK Research in Singapore, said March 9. India, the biggest buyer of vegetable oils after China, will scrap a 4 percent levy on imported edible oils, Finance Minister Palaniappan Chidambaram said on Feb. 28.

Adair is set to be among industry participants who will gather from today for the Palm Oil Annual Price Outlook Conference organized by the Malaysian Derivatives Exchange, which trades the region's benchmark contract.

Mistry, Mielke

The three-day meeting in Kuala Lumpur will feature analysts including Dorab Mistry, director of London-based Godrej International Ltd., and Thomas Mielke, chief editor of OilWorld, the trade publication. It is also scheduled to hear from Abdullah Ahmad Badawi, Malaysia's prime minister, and Peter Chin Fah Kui, the minister for plantation industries and commodities.

Palm oil futures on the Malaysia exchange dropped as much as 12 ringgit, or 0.6 percent, to 1,951 ringgit today, and traded at 1,961 ringgit ($560) at 10:37 a.m. Kuala Lumpur time. The price has increased 35 percent over the past 12 months.

``There is a weather impact'' on prices, said Adair, highlighting the impact of El Nino. There have been ``sub-par rains in Indonesia, especially in Kalimantan,'' he said, referring to the Indonesian portion of Borneo island.

The El Nino weather pattern, caused by a warming of the equatorial Pacific Ocean, typically occurs every four to seven years and can parch parts of Asia, crimping the supply of agricultural commodities. Adair predicts palm oil futures rising to an average of $640 a ton this year and to $680 a ton in 2008.

Astra Agro

El Nino may already have had an impact. PT Astra Agro Lestari, Indonesia's largest palm oil producer by market value, said Jan. 18 that dry weather caused output to drop 12 percent to 205,962 tons in the final three months of 2006 compared with a year earlier.

Adair's forecast is comparable to that from Mistry, the Godrej International director who has been trading oils since 1976. Mistry, who will address the conference on March 14, forecast in December that palm oil will climb this year and next.

``For 2007, the demand for crude palm oil will be high because of biodiesel demand,'' said Stefanus Darmagiri, an analyst at UOB Kay Hian Securities in Jakarta.

Palm oil can be converted into methyl esters, which may be added to conventional fuels to reduce carbon emissions. Such substitutions have come into favor after crude oil more than tripled since November 2001, making biofuels attractive when crude trades above $50 a barrel, analysts say.

Crude Oil

``The substitution effect is quite substantial,'' said Alvin Tai, a plantations analyst at OSK Securities Sdn. Bhd. Crude oil for April delivery fell as much as 78 cents, or 1.3 percent, to $59.27 a barrel in after-hours electronic trading on the New York Mercantile Exchange today, and was at $59.47 at 11:48 a.m. in Kuala Lumpur.

``The demand and supply discrepancy in 2008 will continue primarily because of biodiesel plants that would be operational by then,'' said Sebastian Tobing, an analyst at PT Trimegah Securities in Jakarta.

The 27-nation European Union wants biofuels to make up an average 5.75 percent of transportation fuel by 2010 and 10 percent by 2020. Still, most member states, with the exception of Sweden, Germany and France, are likely to miss the first target, according to the European Commission.

Last year ``was a breakthrough year for palm oil,'' said Tai, the analyst at OSK Securities. ``It was the first time palm oil was seen as a healthier oil compared to soybean oil.''

While soy oil, most of which is cultivated in the U.S., Brazil and Argentina, had long been favored for health reasons, it needs hydrogenation to extend its shelf-life. That process creates trans-fatty acids, a compound that some doctors now deem to be unhealthy.