Palm oil prices to plunge as global output recovers, says Fry

James Fry warns of fall in palm oil prices.

NUSA DUA, Indonesia: Prices for crude palm oil will drop nearly 30 percent by the third quarter of 2017 as global production recovers from the effects of last year's El Nino weather pattern, leading industry analyst James Fry said on Friday.

International crude palm oil output will climb by about 6 million tonnes in 2017, Fry said at an industry conference in Bali.

But he added that Indonesian demand for palm to churn out biodiesel would rein in declines in the market.

He said prices would stand around $500 per tonne on a free-on-board basis (FOB) in the third quarter of next year.

That is way below levels around $685 this week (PALM-MYFOB-P1).

"2017 should enjoy a sharp rebound. In both H1 and H2, world output will be around 3 million tonnes up on 2016," said Fry, chairman of commodities consultancy LMC International, speaking at the Indonesian Palm Oil Conference in Bali.

He added that global palm oil output this year would be over 6 million tonnes down from levels seen in 2015. In 2015, top producer Indonesia produced 33 million tonnes of palm oil, while Malaysia produced 19.96 million tonnes. The two countries account for nearly 90 percent of global output.

A crop-damaging El Nino weather pattern last year brought scorching heat to parts of Southeast Asia, hitting palm yields in top producers Indonesia and Malaysia.

"By Q2, we will see very solid evidence that Indonesia's revival in CPO output is gathering pace, with Malaysia eventually following suit," said Fry.

"The only thing that will stop CPO prices falling below $500 is the BPDP," he said, referring to Indonesia's Estate Crop Fund Agency which oversees biodiesel subsidies in the country.

Indonesia started collecting a $50 a tonne levy on CPO exports last July to fund biodiesel subsidies.

The Southeast Asian nation wants to reduce its oil import bill and cut greenhouse gas emissions by increasing its biodiesel usage. Its so-called B20 programme requires a minimum 20 percent of bio content in diesel fuel this year, up from 15 percent last year.

"Once currency factors settle down, the fundamentals all point to a sharp fall in CPO prices by June," said Fry.

"Instead of prices falling below $500, in 2017 Indonesia's biodiesel policy will reveal its great value in stabilising the CPO market, allowing Q3 FOB prices to settle around $500." - Reuters