Palm oil will probably extend its rally next year as the worst El Nino in almost two decades curbs output in the world’s biggest producers and Indonesia uses more for fuel, according to delegates at a conference in Bali.
Futures climbed to the highest in more than two weeks.
The most consumed cooking oil found in everything from candy to instant noodles has jumped 26 percent from a six-year low in August after drought and smog hurt plantations in Southeast Asia.
At the same time Indonesia is raising the amount of palm blended with diesel to 20 percent from 15 percent.
That’s boosted futures as prices of other farm commodities slump.
“El Nino and the Indonesian biodiesel mandate are a powerful cocktail that has the potential to drive prices in 2016,” Dorab Mistry, director of Godrej International Ltd., said in an interview.
This El Nino will probably rank among the three strongest since 1950, the World Meteorological Organization says.
It’s comparable to record events in 1997-98 and 1982-83, according to the Australian government.
Output fell 5.5 percent in Malaysia and 7.2 percent in Indonesia in 1998, U.S. Department of Agriculture data show.
Production slid 5.1 percent in Malaysia in 1983. The two countries supply about 86 percent of the world’s palm oil.
That’s not to say the drop in output will be so severe this time as new plantations are coming into production.
Indonesian palm oil output will stagnate or fall about 3 percent to between 30.6 million tons and 32.3 million tons in 2016, Bayu Krisnamurthi, the head of the government-appointed Indonesia Estate Crop Fund for Palmoil, said this month.
While estimates varied on how much palm would be used as biodiesel in 2016, most delegates predicted an increase.
Krisnamurthi says Indonesian demand may climb to at least 7.1 million kiloliters (1.9 billion gallons) from 1.3 million kiloliters this year.
Higher Prices
Ahmad Bambang, marketing director of PT Pertamina, sees a threefold growth in the state energy company’s procurement of biodiesel to 5.5 million kiloliters next year from 2014.
Ivy Ng, regional head of plantations at CIMB Investment Bank Bhd., said it could be a game changer if use exceeded market expectations of as much as 3.5 million tons and reached what she called a blue-sky scenario of 7 million tons.
Ng predicts an average palm price of 2,450 ringgit ($579) a ton in 2016.
That compares with an average of 2,218 ringgit so far this year.
Futures added 0.6 percent to 2,355 ringgit on Friday, the highest level since Nov. 11.
Arif Rachmat, chief executive officer at PT Triputra Agro Persada, a producer in Indonesia, said prices could rise as much as 20 percent in 2016 from now.
James Fry, chairman of LMC International Ltd., predicts prices may top $700 by mid-year.
While palm futures have soared, prices of grains have dropped to five-year lows as global inventories of corn, wheat and soybeans rise to all-time highs before next year’s North American harvest.
Risks to the expansion in biodiesel use include a widening premium of palm oil over gas oil which increases the subsidy needed for each ton of biofuel and potential resistance from car manufacturers, delegates said.
Abdul Rochim from the Indonesia Automotive Industry Association said concerns included rough idling, engine stalling and insufficient output power.
Both Indonesia and Malaysia also have high inventories to cushion the impact of a shortage.
Malaysian stockpiles jumped to a record 2.83 million tons in October, Palm Oil Board data show, while reserves in Indonesia reached the highest in 30 months in August, according a Bloomberg survey.
Bloomberg
Fri Nov 27 2015
The most consumed cooking oil found in everything from candy to instant noodles has jumped 26 percent from a six-year low in August after drought and smog hurt plantations in Southeast Asia. - File Photo
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