Kuala Lumpur, 18 January 2012

Average palm oil prices are set to decline in 2012 for the first time in three years, squeezed by ample supply from Southeast Asia and faltering demand as global growth weakens because of Europe's debt crisis. A median poll of 25 analysts tracking top palm oil producers Indonesia and Malaysia showed 2012 price expectations for the tropical oil stood at a median 3,000 ringgit ($960) per tonne, unchanged from a survey conducted in July.

The forecast goes 7.3 percent lower than a record average of 3,237 ringgit per tonne notched last year, when most of the gains came from floods swamping estates in Malaysia in early 2011 at a time of strong demand.

Analysts say the scenario is now different, with Malaysia's opening palm oil stocks well above 2 million tonnes and La Nina-driven rains in late 2011 having a very muted impact on output this year.

"In the near term, the current crude palm oil price of 3,200 ringgit is likely to see support from weather risks, a seasonal slowdown in palm oil production and rising crude oil prices," said Ivy Ng, an analyst with Malaysia's CIMB Investment Bank.

"But this may not last as the weather will improve when La Nina ends sometime in the first or second quarters, and concerns over demand risks rise because weaker global growth will trigger the exit of speculative funds from the market," she added.

Graphic on the Poll

CHINA, INDIA OR THE EURO ZONE?

Estimates for 2012 ranged between 2,600 ringgit and 3,600 ringgit, with analysts divided on the impact of the euro zone debt crisis on economic growth and food demand in the world's top edible oil buyers, India and China. Chinese data this week showed fourth quarter economic growth was its weakest in 2-1/2 years and could head for an even sharper slowdown. Third quarter economic growth in India notched its weakest pace in more than two years.

While this lends weight to the argument that slowing economic growth would hurt commodity demand, analysts expect China to restock its depleted state oilseed and edible oil reserves this year. Last year, the world's second largest economy released state reserves to temper inflation. India, on the other hand, faces a limited rapeseed crop this year as a drier winter season affected sowing, paving the way for more imports.

"We look for the stocks levels to thin out in first-quarter 2012 in China and India, which jointly account for around 27 percent of the market, given the recent slowdown in purchases," said Abah Ofon, an oils analyst with Standard Chartered Bank in Singapore. "They will have to start importing more."

WEATHER WILDCARD

Most analysts do not discount weather wild cards this year, with La Nina induced dry weather in South America potentially curbing competing soyoil supply, effectively boosting demand and prices of palm oil. "If the worst case scenario materialises, in the form of extended drought significantly impacting yields, crude palm oil prices could offshoot our expectations," said James Ratnam, analyst with TA Investment Bank who pegged 2012 average price at 3,200 ringgit.

But ample palm oil production in Indonesia and Malaysia, which account for 85 percent of world supply, may be able to take up the shortfall in soyoil. The analysts, polled over two weeks, expect an increase of 3 million to 3.5 million tonnes from Southeast Asia thanks to an upswing in yields later in 2012 and more oil palm estates maturing in top producer Indonesia.

For 2013, the poll pegged average palm oil prices at 3,000 ringgit, unchanged from the 2012 forecast. "We believe that crude palm oil prices will undergo an unexciting period after the first-quarter peak as production hits a trough and an up-cycle begins," said Alvin Tai, an analyst with OSK Investment Bank in Malaysia.

"It is too early to be overweight on the sector but we think that 2013 will see the start of several years of strengthening palm oil prices as supply in Indonesia potentially reaches a plateau."

Ends --

Reuters - for Commodities Now