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Financial Times: Biodiesel’s rise and robust China demand push palm oil higher

By Andrew Wood in Hong Kong and John Aglionby in Jakarta
Published: February 26 2008 02:00 | Last updated: February 26 2008 02:00

The price of palm oil jumped nearly 6 per cent yesterday to reach a record high on the Bursa Malaysia derivatives exchange, boosted by strong demand from China and India.

Prices have doubled in 12 months as persistently expensive crude oil stokes demand for palm oil, which is increasingly made into biodiesel. The rise in palm oil prices is also linked to the surging cost of other vegetable oils.

The benchmark May crude palm oil contract on the Bursa Malaysia derivatives exchange hit M$3,914 a tonne in Kuala Lumpur yesterday, before closing 4.5 per cent higher at M$3,866. Palm oil has risen 27.5 per cent since the start of the year.

The latest leg of the rally has been supported by Chinese buying, after the country’s rapeseed crop was last month damaged by extreme weather and because of plans by Indonesia, the world’s largest palm oil producer, to raise export taxes.

Analysts will present their views on the outlook for palm oil at the Bursa Malaysia pricing conference, the largest gathering of the industry, which starts in Kuala Lumpur today.

Two of the analysts who were most accurate in their palm oil price predictions last year remain bullish.

Dorab Mistry, a director of Godrej International, the Indian chemicals group, said: “There’s a likelihood that the market will continue to go higher.

“People have not been buying recently and now there is a buying frenzy going on. It’s not only from China – it’s from all over the world.”

News that 9,000 hectares of forest and plantation have burnt down in Riau in Sumatra province in Indonesia has “added fuel to the buying fire”, he said.

Chris de Lavigne, of Frost & Sullivan, forecasts that palm oil will reach M$4,000 a tonne within a couple of months, instead of by the end of the year as he had predicted.

“We’ve gone through a lot of bad weather in China, Brazil and Argentina and so there’s been a tightening of supply [of vegetable oil crops]. You’ve got so much happening at the same time that it’s pushing prices up.

“The agriculture bull run started only a year ago, while the metals bull run has been going for six to seven years. So I think we are not going to see a big correction soon but are entering a different era. Palm oil is taking centre stage in the vegetable oil business.”

Palm oil production, particularly in Indonesia, did not increase as much as was expected in 2007 and forecasts for 2008 were also likely to be high, he said.

Franky Oesman Widjaja, chief executive of Singapore-listed Golden Agri-Resources, one of Indonesia’s biggest palm oil producers, said yesterday that the commodity was looking expensive.

“It’s going to be sustainable, but not at this high level. This is a surprisingly high level,” he said.

Palm oil’s strength yesterday boosted the prices of other edible oil sources. At the Chicago Board of Trade, soyabean futures for March delivery hit a record high of $14.47½ a bushel, double the price a year ago. In Paris, rapeseed futures for May delivery hit a record high of €492 a tonne.

Additional reporting by Javier Blas in London

Copyright The Financial Times Limited 2008

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