01/01/2009 (The Star Online) - THERE seemed to be a decoupling between crude palm oil (CPO) and crude oil prices in recent weeks as the biodiesel hype which started in late 2006 fizzles out with crude oil plunging below US$40 per barrel.

Even when crude oil continued to fall to as low as US$34 per barrel in the middle of this month, CPO managed to trade above RM1,500 per tonne – much to the relief of the oil palm fraternity who want to see CPO traded in equilibrium with the market’s supply and demand.

The big question – has CPO truly decoupled from crude oil price? Many believe this is not true, including prominent industry consultant M.R. Chandran.

He believes that palm-based biodiesel would become critical to palm oil pricing over the next six to eight months.

Demand for rapeseed, soy and palm oils used for biofuel production will increase from 10 million tonnes in 2008 to nearly 12.5 million tonnes in 2009.

On Tuesday, CPO moved up to RM1,670 per tonne because crude oil jumped to US$40 per barrel.

CPO at RM1,670 translates to US$65 per barrel, in other words CPO is 60% costlier than crude oil.

For 2009, global palm oil production will ease off to about 2.6 million tonnes from 4.5 million tonnes in 2008.

Soy oil production will also decrease to 1.15 million tonnes in 2009 compared with 1.82 million in 2008.

However, supply of vegetable oils will increase to 6.9 million tonnes in 2009 from 5.5 million in 2008.

But total demand for global vegetable oils is estimated to grow only to six million tonnes in 2009.

In other words, the world will have a surplus of vegetable oils in 2009.

We also need to ask what would happen if food demand did not grow as expected given the severity of the economic downturn with consumers cutting back on food and fuel consumption.

In that scenario, the best saviour for palm oil could be biodiesel.

To maintain CPO prices at RM1,800-RM1,900 per tonne, Malaysia, Singapore and Indonesia need to convert more CPO to biodiesel.

Production of three million tonnes of biodiesel from about 12 biodiesel plants in South East Asia in the next 12 to 15 months would result in lower palm oil inventories.

It is important to note that CPO at RM1,500 to RM1,600 per tonne does not provide adequate operating margins to plantation companies for reinvestments due to the steep hike in input costs over the past 18 months.