Palm oil falls on equity slump concerns

Palm oil futures in Malaysia, the global benchmark, fell for the fourth day in five on speculation of the rout in global share markets was spurring investors to sell riskier assets such as commodities to raise cash.

The Morgan Stanley Capital International Asia-Pacific Index was set for its biggest decline since June 2006, wiping out gains for this year. Only 28 of the measure's 1,060 stocks rose today as benchmarks slid across the region.

Palm oil for October delivery on the Malaysia Derivatives Exchange lost as much as 58 ringgit, or 2.3 per cent, to 2,426 ringgit ($692) a tonne. The commodity has declined 3.6 per cent in the past five days.

The price of the vegetable oil "will ease down some more,'' said CIMB Futures Sdn. Bhd. S. Chandran in Kuala Lumpur. "With equity markets falling like this, commodity derivatives are being affected.''

The contract for October delivery, the most active, traded at 2,434 ringgit a tonne. The November contract, the next most active, traded at 2,420 ringgit a tonne.

"For October, 2,480 ringgit was the support and that was broken,'' Chandran said. "The thing to look at now is the November contract. The November contract can reach 2,390 ringgit and past that, the critical point will be 2,320 ringgit.''

Dorab Mistry, director at Godrej International, one of India's biggest buyers of vegetable oils, said it's hard to estimate how many contracts are for physical delivery and how many are in the hands of speculators.

"About 10 per cent of the price of the commodity is the result of too much hedge fund money chasing limited supply,'' he said yesterday. "If this hot money is to move out of the market to make margin calls, the 10 per cent upside will disappear and that will happen if this contagion gets more serious.''

"Palm oil could find a floor at 2,200 ringgit a tonne,'' he added, citing supply concerns for all vegetable oils including soybean oil, the main substitute for palm oil.

Soybean oil has averaged 33.46 cents a pound so far this year, 36 per cent more than the same period in 2006 after US farmers planted the smallest crop in 12 years. Palm oil has averaged 2,239 ringgit a tonne this year, 51 per cent higher.

Palm oil is used mainly as a cooking fat and to make cleaning agents. Vegetable oils are also increasingly used in biodiesel as crude oil prices have almost tripled in five years.

Indonesia and Malaysia produce almost 90 per cent of the world's palm oil.