Biofuel demand to lift palm oil price soon - trade

Workers collect oil palm fruits at a plantation in Sepang, outside Kuala Lumpur July 22, 2008.

MUMBAI (Reuters) - Palm oil prices are set to rise soon on higher demand from biofuel makers and stock building by some consumers, while the credit crisis will have only a small impact on the commodity, a leading industry official said.

Derom Bangun, executive chairman of the Indonesian Palm Oil Association, on Saturday said prices would increase slowly at first but 2009 would be bullish.

On Friday, the most-active December contract on the Bursa Malaysia Derivatives Exchange closed up 33 ringgit at 2,313 ringgit ($674) per tonne, having nearly halved since the peak in March.

"The price is now coming to the bottom...I believe the price will soon get stronger," Bangun told the Globoil conference in Mumbai, while leading industry analyst, Dorab Mistry, said prices may fall another 10 percent before they climb.

Bangun said the use of palm oil for fuel would rise as Indonesia and Malaysia planned to encourage the use of biodiesel.

On Friday, Indonesia issued a ministerial decree that will make the use of biofuel mandatory from 2009.

Rising prices for palm oil earlier in the year had led some biofuel producers to temporarily scale back output as it was no longer a cheap alternative to diesel, but Bangun said the fall in prices had again changed the economics of biofuels.

"So we could expect that in the near future, most of these plants will get back into (normal) operation again," he said.

He said low prices were also attractive for manufacturers of palm oil-based products, who made good profits even when prices were much higher.

"Now, as the price of palm oil has gone down, those consumer goods manufacturers are in a very good position to build up their stocks," he said.

Bangun said financial problems in the United States would not have much of an impact on the palm oil market.

He said the United States bought only a million tonnes of palm oil out of 28 million tonnes exported out of Malaysia and Indonesia, while India consumed 4.5 million tonnes of the cooking medium a year.

"We could say that the export of palm oil will be affected only to a very small scale. Import to other countries may not be significantly affected," he said.

"That's why the impact of the financial crisis in the United States will not do a lot to the price movement of palm oil," he said.