Kuala Lumpur, 4 January 2011

Palm oil's price cycle may peak in the first half of 2011 as Asian buyers chase for vegetable oil supplies that are shrinking on adverse weather, said a Goldman Sachs analyst on Tuesday. The tropical oil could hit 4,000 ringgit ($1,305) soon but will come under pressure once output recovers in the second half, said Patrick Tiah, whose 2010 forecast of 2,733 ringgit was the most accurate of 19 analysts polled last January.

Tiah has pegged average 2011 prices at 3,063 ringgit a tonne, a gain of 12.9 percent from last year's 2,714 ringgit as drier weather curbs competing soyoil output in Argentina and U.S. farmers prefer to plant more lucrative corn.

"The supply-demand situation is tight, we expect palm oil to continue a supply-demand deficit for this year and additionally, we see a supply-demand deficit in the other edible oils," Tiah told Reuters in a telephone interview.

Palm oil could be extending gains for a third year in 2011, which may see top producer Indonesia raise export taxes further to ensure domestic cooking oil supplies although a recovery in yields later on in the year will pressure prices.

Tiah pegged 2012 average prices at 2,910 ringgit, 5 percent lower than his 2011 forecast. "What we have seen in the last 12 months is a lot of adverse weather. On the assumption of normal weather for the next 12 months, we could see some recovery in production in the second half and beyond, including for palm oil."

Reuters will issue a palm oil price poll for 2011 and 2012 on Jan. 24.

CHINA, INDIA

China, the world's No.2 palm oil buyer, will continue to drive prices despite recent monetary steps to mop up liquidity and cool inflation, as palm oil is a key ingredient in cooking oil, Tiah said.

The gradual appreciation in the yuan in 2011 could make imported palm-based cooking oil a little cheaper, spurring some growth in consumption.

"For China demand, we are looking at high single digits. Coming from a big base it does have a strong impact," he said. Reuters calculations on China's customs data show that palm oil demand in 2010 probably rose 12.7 percent to an annualised 5.5 million tonnes. With top buyer India, any move by the government to raise import duties on palm oil may lift food inflation, which accelerated to a 10- week high in mid-December.

"At these price levels, increased import duties will have more of a negative impact. Prices are already very high, you are just compounding that effect," Tiah said. In 2008, India dropped a crude vegetable oil import tax and cut the duty on refined oils to 7.5 percent from 27.5 percent in response to high prices.

Indian trade bodies are asking the government to impose a 10-17 percent import tax on oils on prospects of a good domestic oilseed crop.

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