Palm oil prices slide

Published October 11, 2008

KUALA LUMPUR, Oct 10: The dramatic slide in palm oil prices could soon be drawing to an end as growers consider shifting their focus from expansion to renewing older crops, curbing supplies in the medium term.

A level of 1,500 ringgit a ton 15 per cent below current levels -- represents the break even point for plantations, who face a margin squeeze as prices have halved since July while fertiliser and other farm costs stay strong.

If palm oil prices stay below 1,500 ringgit for a prolonged period, Moody’s Investors Service may consider a rating change for a string of palm oil companies in Southeast Asia as lacklustre earnings might hamper financing muscle for expansions, said Hong Kong-based Moody’s analyst Wonnie Chu.

Prices of palm oil, used in cosmetics and biscuits to biofuels, have been pummeled by expectations of bumper harvests in Malaysia and Indonesia, increasing availability, and good oilseed crops in importers India and China, reducing their need for imports.

The prospect of a global recession means that the risks to our already low forecasts for commodities are probably still on the downside, said London-based Capital Economics in a note, adding that farm commodities could drop by as much as a third.

Analysts said producers would also feel the pinch from hefty fertiliser bills, which are likely to double to a total 5 billion ringgit in Malaysia this year. Fertiliser accounts for more than half of the total cost of producing palm oil.

Replanting existing estates will be a priority in Malaysia, helping the country meet its annual target of replacing 200,000 hectares of oil palm trees aged 25 years and above.

Previously this target, which would yield 600,000 tons of crude palm oil, could barely be met as producers were more keen to acquire greenfield land in Malaysian and Indonesian territories on Borneo island and buy out smaller firms.—Reuters

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