Palm Oil Seen by Mistry Influenced by El Nino and Biofuels

Bloomberg, 4 March 2014

By Ranjeetha Pakiam

Palm, the world’s most-consumed edible oil, will see prices influenced by a potential El Nino weather event and increased biodiesel demand from Indonesia, according to Dorab Mistry, director at Godrej International Ltd.

“The supply side will be dominated by the possibility of an El Nino,” said Mistry, who’s traded edible oils for more than three decades. “The demand side of the equation has been overtaken by biodiesel,” Mistry wrote in an e-mailed reply to questions from Bloomberg before an industry conference.

The oil that’s used in foods and biofuels posted the biggest advance since October last month as drier-than-usual weather in the main growing regions in Southeast Asia coincided with forecasts that an El Nino may begin later in 2014. The event, which affects weather worldwide, can parch Indonesia and Malaysia, the largest producers. While inadequate rain generally hurts palm supplies nine to 18 months later, prices move in advance, according to hedge fund managerMichael Coleman.

“The current dry weather is only a side-show,” wrote Mistry, who’s scheduled to address the Palm and Lauric Oils Conference in Kuala Lumpur tomorrow and participated in a panel discussion at the gathering today. “The current rally in palm prices simply confirms the fact that palm is very much an anticipatory market,” he wrote.

Coleman’s Outlook

Palm surged 9.4 percent on the Bursa Malaysia Derivatives last month, extending a rebound from a more than three-year low in July. The most-active contract — which advanced to 2,860 ringgit a metric ton yesterday, the highest level since September 2012 — traded at 2,804 ringgit at 3:19 p.m. in Kuala Lumpur. Futures may rise to 3,000 ringgit within four months, Coleman, who helps manage the $143 million Merchant Commodity Fund, has forecast.

The current dry weather, which began in early February, may end in the middle or at the end of March as the season changes to the inter-monsoon from Northeast monsoon, according to the Malaysian Meteorological Department. The lack of rain prompted water-rationing around Kuala Lumpur, while neighboring Singapore is experiencing a record dry spell.

In Indonesia’s Riau province, officials declared a state of emergency as fires blanketed the region in haze. Indonesia and Malaysia account for 86 percent of worldwide palm oil output, according to the U.S. Department of Agriculture.

This year will be bullish for palm oil, with prices advancing to 3,000 ringgit within eight weeks after the dryness in Indonesia and Malaysia, according to Sandeep Bajoria, chief executive officer of Mumbai-based Sunvin Group. In the event of an El Nino, prices may reach 3,300 ringgit to 3,500 ringgit by December, Sandeep said in an interview yesterday.

El Nino Forecast

An El Nino, which can also parch Australia while bringing rains to South America, may occur in the coming months, Australia’s Bureau of Meteorology, said on Feb. 25. There’s a 75 percent chance an El Nino will occur in late 2014, according to researchers Josef Ludescher and Armin Bunde, who published their forecast in the journal PNAS last month.

“In 2014, China and India will not dominate the demand scenario, it will be biodiesel,” said Mistry. Still, it remains to be seen how much of the new mandate will be fulfilled in Indonesia, the world’s largest producer, he wrote.

As much as 3.4 million tons of palm oil will be used for biodiesel in Indonesia this year, according to Fadhil Hasan, executive director of the Indonesian Palm Oil Association. Southeast Asia’s biggest economy increased the blending rate to reduce import costs and narrow the current-account deficit.