NUSA DUA, Indonesia Nov 30 (Reuters) - Palm oil prices are set to start 2013 on a sour note as record high stocks and rising output in Southeast Asia overwhelm already weak demand, while regulatory uncertainty in top buyers India and China adds to the gloomy outlook.
Analysts and traders at an industry meeting in Bali expect the world's biggest palm oil producers, Indonesia and Malaysia, to boost supplies next year, barring any weather disruptions.
An increase in the amount of edible oil on the global market is likely to further weigh on benchmark Malaysian futures 0#FCPO:, which are set to post their worst annual performance this year since the 2008 financial crisis. The profits of big palm oil firms, such as Singapore's Wilmar WLIL.SI and Malaysia's Sime Darby SIME.KL, are also likely to be eroded.
While lower prices will attract food demand, appetite could be curbed by possible regulations by China and India. India, the world's biggest buyer, may set higher taxes on edible oil imports to protect oilseed farmers, and China launches strict quality curbs for imports on Jan. 1.
"I am steadily coming to the conclusion that the days of supernormal profits in palm oil cultivation are coming to a close," influential palm oil market analyst Dorab Mistry said.
"Overall I expect vegetable oil prices to remain rangebound in the first half of the year and to begin a major bear market in the second half," he told the conference.
Mistry, who handles the edible oil trading portfolio for India's Godrej Industries, forecast palm oil to "break down" if India hiked import taxes.
Otherwise, palm oil futures will trade between 2,300 and 2,600 ringgit between now and February 2013, as high stocks more than make up for strong Asian demand growth, he said.
Other analysts and traders surveyed by Reuters at the meet also saw palm oil prices averaging 2,500 ringgit next year, or 17 percent off this year's average of 3,016 ringgit.
SOAKING UP MORE SUPPLY
Palm oil is now trading at above 2,350 ringgit, sharply lower than year-ago levels of above 3,000 ringgit.
Prices next year will be affected by the performance of benchmark Brent crude oil and the Chinese quality requirements, said James Fry, chairman of consultancy LMC International.
"There are three possible outcomes," he said, referring to the Chinese curbs. "More crude palm oil or crude olein imports for refining, more polishing of RBD olein imports and maybe more fractionation of RBD palm oil imports."
Higher crude prices could boost the appeal of Asian palm oil, and shrink Malaysian inventories to 1.8 million tonnes by June 2013 from a record 2.5 million in October, Fry said.
Palm futures are unlikely to change too much from current levels if Brent futures fall to around $90 a barrel, he added. If Brent stays at around $110, palm oil could hit 2,950 ringgit.
Palm oil demand has fallen this year, crimped by financial woes in Europe and economic slowdown in China.
Next year, producers will also have to contend with even higher supplies from both Malaysia and Indonesia, which makes for a challenging market unless the global economy picks up.
Mistry, in his first estimate of Indonesian output, forecast production to rise to 29.5 million to 30 million tonnes in 2013 from a projected 27.5 million this year, exceeding estimates by the official industry association GAPKI.
He also forecast Malaysian output growing at a slower pace, to 19 million tonnes next year, from an estimated 18.4 million this year.
Not all analysts, however, rue the increase in supply.
Thomas Mielke, editor of Hamburg-based research house Oil World, believes the increase in palm oil supply will help fill the gap left by a decline in soybean production in the Americas.
He forecast crude palm oil prices, now trading at a record $350 discount to soybean oil, would start rising as more customers make the switch.
"Global soybean supplies are tight," he said. "I expect that palm oil futures will appreciate to 3,100 to 3,200 Malaysian ringgit sometime in March, April, May 2013."
Indonesia's rapidly expanding edible oil processing industry is also likely to help soak up the extra output.
Indonesia's Palm Oil Board forecast total palm oil consumption to rise to about 7.5 million tonnes next year, from an expected 7 million this year.
Jakarta is also considering increasing tax incentives to encourage palm oil companies to set up refineries, a government adviser said, as it develops its downstream sector to compete with Malaysia and draw in more export earnings.
