Palm | Kelapa Sawit

KUALA LUMPUR, Oct 16 (Reuters) - Record stocks of palm oil in No.2 producer Malaysia could fall if prices 0#FCPO: drop further, stepping up demand from the biofuel industry at a time when Brent crude remains well above $110 per barrel, analysts at an industry meeting said.

Palm oil prices have fallen by a fifth since the start of the year as weak fundamentals, aided by bleak global economic prospects, weighed on sentiment.

But they could drop from 2,465 ringgit ($810) per tonne now as stockpiles could reach as much as 3 million tonnes by the start of 2013, swelled by strong output and slowing exports, the analysts said in the Malaysian capital on Tuesday.

Food demand for Malaysia's palm oil has slowed because top buyers India and China have built up large stocks of imported oils, they said. Malaysian refiners are also losing business to Indonesian rivals who offer cheaper cargoes after Jakarta cut taxes on the grade last year.

But help for exports could also come from a plan by Malaysia to remove a quota on shipments of tax-free crude palm oil and cut export duties by January 2013 to help refiners become more competitive, the analysts said.

"This, together with the emergence of price-sensitive biofuel demand, should stop stocks rising from December, pulling up the premium for palm oil over Brent crude," James Fry, head of commodities consultancy LMC International, told a palm oil trade seminar.

Rising prices of Brent crude oil LCOc1, which rose above $116 on Tuesday, driven by Western sanctions on Iran and its nuclear programme, could burnish the appeal of biodiesel, although Fry says current levels of crude oil are not very sustainable, given slowing global economic growth. O/R

Fry's view on stocks were shared by Dorab Mistry, head of edible oil trading with Indian conglomerate Godrej International, who said Malaysian palm oil futures should fall to 2,200 ringgit in the next 4 to 6 weeks to reflect fundamentals and a draw in energy demand.

Palm oil could then be competitive for blending into fuel for electricity generation or biodiesel, and within three months potentially reduce Malaysian stocks from a record of 2.48 million tonnes hit in September, he said.

"If prices are held artificially high, it will be counter-productive and stocks on Jan. 1 could be much higher and could remain at 3 million tonnes until March 1, 2013," Mistry said.