28/09/2010 (Channel News Asia), Singapore - After climbing steadily for most of the year, prices of crude palm oil are expected to hit a plateau.

Experts said prices of the commodity could range between 2,400 ringgit and 2,700 ringgit per metric tonne for the rest of the year.

They added that demand for the commodity will continue to be strong going forward.

Current palm oil prices have gained more than 10 per cent since April this year.

However, experts from Nomura, speaking at a Nomura Media Roundtable session, said they expect palm oil prices to move within a narrow range for the rest of the year.

This is because of stiffer competition from soybean oil, which can be a substitute for palm oil.

Ken Wong, research analyst at Nomura, said: "Those two make up the two most widely consumed vegetable oil. So in itself, it's pretty much substitutable. If you are talking about the uses in cooking oil, bio fuels, you can pretty much substitute the both of them.

"So on that basis, CPO has been seen as a cheaper alternative to soya bean oil. But once you reach that parity, you are going to see a lot of switching around between the two oils."

Palm oil accounts for between 25 and 30 per cent of vegetable oil production, while soybean oil constitutes less than 25 per cent.

Indonesia and Malaysia are the main exporters of palm oil. Together, they produce 86 per cent of the global palm oil production.

Analysts said despite the rising competition from soybean oil, demand for palm oil will remain sustainable. This is because it is an edible vegetable oil and a food necessity.

Indonesia and Malaysia's supply of palm oil is also expected to increase this year.

Nomura said Indonesia's supply for the commodity is expected to increase by 5 per cent to 22.2 million tonnes for this year, while Malaysia's production is expected to rise by 2 per cent to 18 million tonnes for the same period.

However, Nomura cautioned that this growth will depend on how supply recovers in the second half of the year - which is typically the most important time for production.

Mr Wong said: "It has been a rough year for production this year. Some people at the start of the year expected between 8 and 12 per cent growth for Indonesia and 3 per cent and above for Malaysia. But it hasn't panned out as most people expected.

"There are two schools of thought here. Some people say it is due to the under fertilisation. ... So that's one of the reasons why production has been lower than expected.

"The next reason is relatively strong production from Indonesian companies in 09 and we've seen a reversal of that now, which is quite natural because it tends to be cyclical."

Nomura added that production could be affected in the first quarter of next year if adverse weather effects from La Nina continue into the new year.