Palm Oil Declines on Concern Global Recession May Reduce Demand

By Feiwen Rong

Nov. 4 (Bloomberg) -- Palm oil futures in Malaysia declined from a two-week high amid investor concern that a looming world recession might reduce demand for the tropical oil.

A U.S. industry report yesterday showed manufacturing last month contracted at the fastest pace since 1982. A slowdown in the U.S. may drag on global growth, as evidence that Japan and China are also faltering mounted since the start of last month.

``We have turned neutral on the plantation sector amid a potentially protracted global recession next year, which could dampen commodity prices through first half of 2009, beyond the January-February seasonally low production period,'' Ong Chee Ting, analyst at Aseambankers Malaysia Bhd., said in a report today.

Palm oil for January delivery fell as much as 5.5 percent to 1,575 ringgit ($445) a ton on the Malaysia Derivatives Exchange, before trading at 1,593 ringgit. It touched a three-year low of 1,331 ringgit a ton on Oct. 28, 70 percent below its March record.

Economy in China, the world's largest importer of palm oil, grew an average 9.9 percent over the past 30 years. Manufacturing contracted by the most on record last month as the global credit crisis sapped export demand, according to two surveys released in the past three days.

Aseambankers Malaysia cut its average crude palm oil price forecast for 2009-10 to 1,600 ringgit a ton from 2,500 ringgit previously, Ong said. The bank has also lowered its 2008 average price forecast to 2,850 ringgit a ton from 3,000 ringgit a ton.

Crude Oil Drop

Prices could decline as low as 1,200 ringgit in the next 12 months ``as we anticipate crude oil to potentially dip below $50 a barrel,'' he added.

Crude oil for December delivery lost 0.8 percent to $63.40 a barrel at 11:37 a.m. in Singapore. Crude has tumbled 57 percent from a record $147.27 a barrel in July as the U.S. economy shrank in the third quarter by the most since 2001.

Vegetable oils track crude as they can be used as biofuels.

Soybean oil for December delivery, which dropped 24 percent in October, dropped 1.1 percent today to 34.37 cents a pound in after-hours trading on the Chicago Board of Trade at 11:36 a.m. in Singapore. It is still trading at 69 percent premium to palm oil, according to Bloomberg data. The premium reached the highest in a year of 89 percent on Oct. 29.

Palm and soybean oils are substitutes.

To contact the reporter on this story: Feiwen Rong in Singapore at frong2@bloomberg.net