Indonesia Says Palm Oil Demand Strong as Prices Fall

By Leony Aurora

Aug. 17 (Bloomberg) -- Indonesia, the world's biggest palm oil producer, expects demand for the vegetable oil to remain strong after prices of the commodity slumped in the past month, Trade Minister Mari Pangestu said.

Palm oil for October delivery, the most-actively traded contract on the Malaysia Derivatives Exchange, fell as much as 8.7 percent to 2,392 ringgit ($714) a metric ton on Aug. 15, the lowest since May 9, 2007. The contract closed at 2,453 ringgit. Shares in palm oil producers also declined.

A drop in prices of commodities such as palm oil and coal may slow an increase in the value of Indonesian exports, which helped boost economic growth in the second quarter. Rising demand from the world's two most-populated nations, India and China, may help sustain demand for palm oil, Pangestu said.

``Demand is still strong from China and India,'' Pangestu told reporters in Jakarta today. Demand from Europe for use as a biofuel is also rising.

Indonesia's economic growth unexpectedly accelerated to 6.4 percent in the second quarter as rising prices and demand for the nation's coal, palm oil and rubber pushed exports to a record. Economists had expected a 6.1 percent gain. Demand may rise as Asian nations prepare for the festive season.

``China, India and Middle Eastern countries should commence their palm oil buying operations shortly ahead of the upcoming festival season,'' Alexander Ivanovitch, a London-based analyst at Kaupthing, Singer & Friedland Group, said in a note to investors on Aug. 15. ``Long-term fundamentals for palm oil remain solid, as a result of the increasing global demand from the food industry, bio-fuels demand and trans-fatty acid free oils demand in the U.S.''

Diwali, Id-Ul-Fitr

Muslims nations in the Middle East celebrate Id-ul-Fitr in October, while India may boost purchase of vegetable oil before the festival of Diwali the same month.

Traders in China, the world's biggest oilseed consumer, have canceled orders for almost 150,000 tons of palm oil and some soybeans on weak domestic demand and plunging global commodity prices, according to China Cereals and Oils Business Net, an agricultural market researcher.

Delivery Declined

In the past two weeks, some of the biggest dealers in China have declined to take delivery of palm oil shipments and sold back five cargoes of soybeans, said Gao Yingbin, an analyst at the researcher.

The decline in palm oil prices may not affect Indonesia's export growth target, Pangestu said after celebrations to mark the nation's 63rd Independence Day. Southeast Asia's biggest economy is targeting export growth of as much as 15 percent this year, she said.

``We're confident that with higher volume and increases in other exports not related to commodities, like automotive and footwear,'' Indonesia will meet its growth target, Pangestu said. The 30 percent increase in exports in the first six months of the year will ensure the goal is reached even if commodity prices fall in the second half, she said.

To contact the reporter on this story: Leony Aurora in Jakarta at laurora@bloomberg.net; Arijit Ghosh in Jakarta at aghosh@bloomberg.net;