Palm oil posts worst start to year since 2010 as demand slows

[KUALA LUMPUR] Palm oil capped the biggest January decline since 2010 as demand weakens amid a supply glut.

Futures dropped 5.3 per cent this month, the most since November, as a slump in exports from Malaysia, the largest producer after Indonesia, signals a slowdown in demand. Output in the two top suppliers is set to climb to a record this year.

Palm oil, used in food and fuel, slumped 16 per cent in the past year as a plunge in petroleum costs reduced its allure and global soybean crops headed for an all-time high. Soybean oil fell to a six-year low on Thursday, increasing its attraction as an alternative. Slowing world economies may further hurt demand, said Carey Wong, an analyst at OCBC Investment Research.

"Supply is still going to be pretty robust," Mr Wong said by phone from Singapore. "It's completely unprofitable to process palm into biodiesel."

Futures dropped as much as 1.3 per cent to RM2,106 (US$580) a metric ton on the Bursa Malaysia Derivatives, the lowest in more than a month, before closing 0.6 per cent higher at RM2,147. Soybean oil tumbled to 29.32 cents a pound in Chicago on Thursday, the lowest since 2008.

Palm rallied to RM2,394 about two weeks ago, the highest since July, as floods in Malaysia disrupted production. The advance was aided by a weakening ringgit, which touched a five-year low against the dollar on Thursday.

"Supply constraints and depreciation of Malaysian ringgit are supportive of palm prices in the short-term," Rabobank International analysts led by Stefan Vogel wrote in a report. The outlook for a good soybean crop in South America and weak demand including from biodiesel may weigh on prices, they said.

Palm oil has surged to a premium over gas oil of US$111 a ton from a discount of about US$259 in August.

Shipments from Malaysia dropped 18 per cent to 886,189 tons in the first 25 days of January from a month earlier, Intertek, a surveyor, said on Jan 26. Output may climb to a record 20.09 million tons this year from 19.67 million tons in 2014, according to the palm oil board.

Exports from Indonesia fell 13 per cent to 1.97 million tons in December from a month earlier, the Indonesian Palm Oil Association said in Jakarta on Friday. Production may rise to 33 million tons from 31.5 million tons in 2014, said Joko Supriyono, secretary general.

"On the demand side, we have the World Bank cutting the outlook for global economic growth," OCBC's Mr Wong said. "There's also the substitute vegetable oil, soybean oil, at six-year lows. We don't see any positive catalysts."

BLOOMBERG