Malaysia may act rapidly should prices of palm oil extend its decline

Malaysia, the world's 2nd-largest palm oil producer, may act rapidly should prices of the edible oil extend their decline, Plantation Industries and Commodities Minister Peter Chin Fah Kui said.

"We might need to take immediate measures" if prices "drop drastically below 2,000 ringgit (US$590) a ton," Chin said in a phone interview.

Palm oil, used in cooking and as an alternative fuel, has slumped as supplies from Malaysia and Indonesia, the top growers, outpaced demand. The price plunged to a 15-month low in Aug as tumbling crude oil reduced its attraction as a biofuel.

"Production is improving in '09 and '10 so prices will continue to fall," Nirgunan Tiruchelvam, assistant director at ABN Amro (S) said by phone. "Even if they want to intervene, it may not dent overall supply."

Malaysia is trying to "ensure there is no oversupply," Chin said. "We're encouraging the industry to clear their stocks and asking companies not to import" crude palm oil from other countries like Indonesia.

The country's stockpiles reached a record 2.04 m tonnes in Jun before declining to 1.98 m tonnes in Jul, according to the Malaysian Palm Oil Board.

"Last month, we had an oversupply of 2.1 m tons,'' Chin said. "That's too much and we must understand that it's not only Malaysia that produces palm oil but Indonesia" too.

The 2 countries produce almost all the world's palm oil. Indonesia's output may exceed 19 m tonnes this year, while Malaysia may produce more than 17.4 m tonnes, Dorab Mistry, director at Godrej International Ltd., said at a conference in Kuala Lumpur.

Palm oil must drop to 2,200 ringgit a tonne in the next few weeks for demand to recover, Mistry said.

"We have at present a deadly cocktail of rising production combined with some demand rationing," he said. "Prices have to go to the level where they create strong demand growth."

The slump in palm oil prices has prompted Indonesia to consider mandating use of the cooking oil to make biofuels and Malaysia to boost exports and local consumption to support prices. Buyers in China and India, the biggest importers, are seeking to defer deliveries and renegotiate purchases.