04/11/2008 (Business Times) - THE price of palm oil, which has plunged 64 per cent from its March record, is unlikely to advance for two years as a possible global recession risks cutting demand for commodities, Aseambankers Malaysia Bhd forecast.

The edible oil, used in cooking and as a biofuel, will probably average RM1,600 (US$452) a ton in 2009 and 2010, Ong Chee Ting, an analyst at Aseambankers in Kuala Lumpur, wrote in a report today. Palm oil is now trading at about that level.

The global financial crisis has pushed the US closer to recession, reducing international trade and demand for goods from crude to food exports. The forecast for steady palm oil prices suggests efforts by the government in Malaysia, the world's second-largest grower of the commodity, to boost prices may fail.

"The risk of an extended global recession has clearly emerged," Ong said. "While we remain enthusiastic over its long-term prospects, the plantation sector's intermediate-term returns have become less juicy."
 
Malaysia's government said October 30 it plans to cut down some palm oil plantations in an effort to trim production and help reverse tumbling prices. Indonesia, the world biggest maker of palm oil, and Thailand are taking similar steps to reduce domestic output of commodities including rubber.

Aseambankers also cut its earnings forecasts for producers including Sime Darby Bhd and IOI Corp, Malaysia's two largest palm oil makers, for the next three years. Ong slashed his profit estimates between 11 per cent and 96 per cent.

'Demand Destruction'
"Demand destruction is the key concern for 2009," Ong said, cutting his rating on Malaysia's plantation industry to "neutral" from "tactical overweight."

In the worst case, the price of palm oil may plunge to less than RM1,200 a ton, should crude oil drop to less than US$50 a barrel, Aseambankers said.

Crude oil, trading at US$63.25, has tumbled about 57 per cent from a record US$147.27 a barrel in July. Still, palm oil probably won't stay at such a low level for more than four months, according to the report.

Before today's cut, Aseambankers previous forecast for palm oil prices in 2009 and 2010 was RM2,500 a ton. - Bloomberg