Palm Oil Drops a Fifth Day on Stockpiles, Recession Concerns

By Claire Leow

Nov. 17 (Bloomberg) -- Palm oil futures dropped for a fifth day on concerns that a global recession will cut demand and add to an oversupply that's driven Malaysian stockpiles to a record.

Inventories gained to 2.09 million tons in October, the Malaysian Palm Oil Board said last week. Output also rose 4.6 percent to a record 1.65 million tons from the previous month. Japan, Hong Kong and the Euro-zone countries fell into recession in the past quarter.

``Crude palm oil production is galloping,'' Nirgunan Tiruchelvam, an analyst with ABN Amro Asia Securities (Singapore) Pte, said by phone. ``We expect production growth to be higher than demand growth, which will put a damper on palm oil prices.''

Palm oil for January delivery on the Malaysia Derivatives Exchange fell as much as 1.9 percent to 1,428 ringgit ($397) a metric ton, the lowest since Oct. 29. The contract was at 1,441 ringgit at 12:05 p.m.

Indonesia may produce 18.6 million tons this year, according to Derom Bangun, president of the nation's palm oil association. Malaysia will probably produce 17.5 million tons. Both are records.

Japan's economy, the world's second largest, shrank in the third quarter, the Cabinet Office said today. The nation entered its first recession since 2001 as companies cut spending.

Gross domestic product in the 15 euro nations shrank 0.2 percent for the second straight quarter in the three months through September, the European Union's Luxembourg-based statistics office said Nov. 15.

Crude Declines

The economic slowdown has contributed to a decline in crude oil prices, tracked by palm oil as the tropical commodity can be used as a biofuel for alternative energy.

Crude oil in New York for December delivery dropped as much as 2.5 percent today, after losing 16 percent over the previous two weeks. It dropped 1.6 percent to $56.11 a barrel at 12:05 p.m. Singapore time.

Indonesia and Malaysia, the largest palm oil producers, are implementing policies to require mandatory blending of palm oil- based biodiesel as alternate energy to reduce energy costs. The countries have also pledged to replant aging palms to cut 800,000 tons of supply next year.

``That will have minimal impact because most of the demand for biodiesel is in Europe and the U.S., where the markets are more developed,'' Tiruchelvam said.

Palm oil futures could drop to 1,200 ringgit a ton if crude oil falls to $50 a barrel or lower, Dorab Mistry, director at Godrej International Ltd., said Nov. 14.

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