[MUMBAI] Crude palm oil (CPO) prices are likely to surge 40 per cent to US$700 per tonne by mid-2016 as an El Nino weather event dents output and as top producer Indonesia uses more palm-based biodiesel, leading industry analyst James Fry said.
The world's top palm oil producing countries, Indonesia and Malaysia, have been getting lower-than-normal rains due to El Nino this year, triggering worries about tighter supply and pushing up benchmark palm futures more than 25 per cent from a 6-1/2-year low plumbed in August.
Palm futures had soared 57 per cent in 2009, partly due to El Nino, which typically leads to scorching weather across Asia and east Africa but heavy rains and floods in South America. "An El Nino would take prices well above US$700 (free-on-board) by mid-year, with world CPO output in 2016 below that in 2015," said Mr Fry, chairman of commodities consultancy LMC International. CPO was trading at around US$500 on free-on-board (FOB) basis on Tuesday.
Thomas Mielke, editor of Hamburg-based newsletter Oil World, on Monday said he expects El Nino to bring down Malaysian palm output in September versus August levels.
Apart from weather worries, higher use of palm-based biodiesel by Indonesia could also tighten supplies of the tropical oil from the world's top exporter, analyst Fry said.
Indonesian president Joko Widodo signed a regulation in May to impose US$50 per tonne levy on CPO shipments that would be partly used to help fund biodiesel subsidies. "Discretionary biodiesel sales are not viable at current prices, but if Indonesia's levy fund subsidises local biodiesel, as was originally intended, its impact could be large," Mr Fry told an industry conference Globoil India on Tuesday. "Even without an El Nino, prices should go above US$600 during the first quarter of 2016. This assumes that the Indonesian fund implements its subsidies in full," he said.
A steeper fall in palm prices versus that of fertilisers in the past few months has prompted farmers to cut their use of fertilisers, said Fry, adding that this would "hit production in the usual slowdown in South East Asian output after November".
Higher crushing of soybeans for meal would increase soyoil supplies and could make it cheaper than palm oil by mid-2016, Mr Fry said, denting demand for rival palm oil. Usually soyoil trades at a premium to the tropical oil.