AMSTERDAM (Reuters) - A recent dramatic rise in palm oil futures in Asia has hurt demand in Europe, making power and biofuel production from palm oil unprofitable, traders and industry officials said on Friday.
Malaysian palm oil futures gained more than 29 percent this year on dwindling supplies at home and robust demand from top importers India and China. They surged 40 percent last year mainly on the back of demand from biodiesel producers.
The physical market in western Europe has followed suit, with June deliveries of crude palm oil in Rotterdam reaching record highs of $827.50 per metric ton in Europe this week, up by $60 from two weeks ago and $220 since the start of the year.
“We anticipated a rise but we didn’t really expect this,” one European vegetable oil trader said. “Demand from both food and energy buyers has decreased substantially,” he added.
Industry officials and Hamburg-based oilseeds analysts Oil World said that the sharp rise in global vegetable oil prices in recent weeks was making biofuel production from edible oils unprofitable and world production was likely to fall.
“The use of palm oil in electricity generation or in the bioenergy sector, isn’t viable at prices above $600 a tonne,” said Edgare Kerkwijk, chief financial officer of Dutch Biox which is the largest supplier of palm and other edible oils to the European energy sector.
Biodiesel is produced in Europe mainly from domestically grown and imported rapeseed oil and smaller amounts of soybean and palm oil.
Industry officials forecast last year that the usage of soybean and palm oil in biodiesel production in Europe was due to rise because rapeseed oil had become too expensive.
RAPESEED BACK IN FAVOUR
But the pendulum is now swinging in favor of rapeseed oil again. An expected a rise in world rapeseed production in 2007/08 on the back of larger plantings will be an advantage for rapeseed oil, analysts said.
Palm oil is also used in Europe to produce electricity in countries like the Netherlands and Britain.
European industry officials and traders said they viewed the current rise in palm oil prices as overdone and attributed it partly to speculative demand from commodity funds.
“We can see that there’s speculation in the market by the funds. The question is how long the speculators can keep prices high because eventually, it will come back to fundamentals,” Kerkwijk said.
He added he expected prices to be lower by the end of the year, pegging the long-term fair price of crude palm oil at around $500 to $550 per tonne.
Vegetable oil prices, especially soybean oil, are increasingly linked to crude oil because global biofuel output means edible oils are viewed as an energy commodity.
But biofuels have higher production costs and need to be cheaper than fossil fuels for producers to achieve sufficient earnings.
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