Palm Oil Declines as Crude Oil Falls, Recessions Erode Demand

By Claire Leow

Nov. 21 (Bloomberg) -- Palm oil futures dropped for a second day, poised for their second weekly decline, after a fall in crude oil signaled lower demand for fuel substitutes amid a worsening global recession.

Crude oil fell for a sixth day to less than $50 a barrel on concern more countries' economies are contracting. The U.S., Japan, the 15 countries that use the euro, Hong Kong and Singapore all fell into recession in the third quarter. Taiwan's economy will also contract, the government said yesterday.

Palm oil, used in foods, can also be blended with diesel to stretch fossil fuels. Record crude prices in July of more than $140 a barrel helped to support palm oil prices on investors' perceptions it would buttress a drive for alternative fuels.

There's ``a lot of pressure'' on palm oil because of the economic environment, Dorab Mistry, director at Godrej International Ltd., one of India's largest palm oil buyers, said Nov. 19. The price may fall to 1,200 ringgit ($331) a ton, near the cost of production, if crude fell to less than $50, he said.

Palm oil for January delivery on the Malaysia Derivatives Exchange fell as much as 5.6 percent to 1,386 ringgit a ton. The contract was at 1,411 ringgit at 11:13 a.m., a decline of 3 percent so far this week.

Palm oil futures may average $570 a ton next year, 42 percent lower than previously estimated, ABN Amro Asia Securities (Singapore) Pte's assistant director Nirgunan Tiruchelvam said on Nov. 18. Prices have averaged 2,996 ringgit this year.

The Malaysian Palm Oil Board on Nov. 10 said that country had a record stockpile in October of 2.1 million tons, while output rose 4.6 percent to a record 1.65 million tons compared with September.

Malaysia may produce 17.5 million tons this year, and Indonesia may harvest 18.6 million, both record crops, according to official projections. The two nations account for about 90 percent of global palm oil output.

To contact the reporter on this story: Claire Leow in Singapore at at cleow@bloomberg.net