Palm oil declines amid weakening demand outlook

Palm oil dropped the most in more than six weeks after the Federal Reserve signalled "significant downside risks" to the US economy, raising concerns that global demand for commodities may weaken. The December-delivery contract on the Malaysia Derivatives Exchange declined 1.9 per cent to close at 3,009 ringgit per metric ton, the most since August 9. Futures have shed 21 per cent this year. The Fed said on Wednesday it will replace $400 billion of short-term debt in its portfolio with longer-term Treasuries to reduce borrowing costs and counter the rising risk of another recession. A day earlier, the International Monetary Fund cut its global growth forecast and predicted severe repercussions if Europe fails to contain its debt crisis or US policy makers become deadlocked over fiscal plans. "If the whole economy drops further, it will definitely soften demand somewhat, but I think for edible oil it probably won't be that massive," said Alvin Tai, an analyst at OSK Holdings Bhd. The spread between palm oil and soybean oil "is still quite huge, so that would be supportive of prices." Soybean oil's premium over palm oil widened to $246.27 a tonne yesterday from $244.34 Wednesday. It touched $289.96 a tonne on August 31, the highest since November 2008. This compares with an average of $161.39 this year, according to Bloomberg data. Palm and soybean oils are substitutes in food and fuel uses. Global demand for oilseeds and cooking fats may decline as high prices and the economic uncertainties in the US and Europe hurt consumption, Oil World Executive Director Thomas Mielke told a conference in Jakarta yesterday. Palm oil in Rotterdam will trade at or above $1,000 a tonne, he said. Sime Darby Bhd expects harvests from plantations in Malaysia and Indonesia to climb in the year to June as yields improve, according to group CEO Mohammad Bakke Salleh. Futures may hold at 3,000 ringgit a tonne until the yearend because of their "significant discount" to other cooking oils and demand from India ahead of the Diwali festival, he said.