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Kuala Lumpur. European consumers will be forced to boost shipments of palm oil, despite a vigorous campaign by green groups against it, after a drought that shriveled oilseed crops across the Black Sea region.

Palm oil futures on the Bursa Malaysia Derivatives Exchange climbed to a 15-month top last week and the market could be set for further gains as European consumers scurry for supplies to satisfy demand from the food and fuel sectors.

A storm could be brewing in global vegetable oil markets, analysts say, although not on the scale seen in United States wheat futures, which surged to two-year highs this month.

“Europe’s rapeseed crop was lower than expected and Ukraine is going to have a very limited supply available for exports,” said Doug Whitehead, a commodities analyst at Rabobank in London.

“It really means that rapeseed oil supplies will be very much constrained, so it is likely we will see palm oil moving as a substitute.”

Hamburg-based analysts OilWorld forecast the European Union’s palm oil demand to rise 4.4 percent to 5.7 million metric tons in the oil marketing year to September 2010, making the region the No. 3 buyer after India and China.

That coincides with expectations for the EU’s rapeseed crop to fall 7.8 percent to 19.9 million metric tons in 2010 from a year ago while Ukraine’s sunflower crop may drop 2.7 percent to 7.1 million metric tons, OilWorld data showed.

Excessive rains are likely to cut canola production in Canada, reducing exports nearly 20 percent to 6 million metric tons.

Data from cargo surveyors shows that demand for Malaysian palm oil from the region has outpaced India and China so far in August, and traders expect more.

“We expect to see some new orders coming in this week onwards to about September or October,” said a trader with a Singapore-listed planter, who deals with European buyers.

“Inquiries are there and sentiment is positive. European customers will buy on small dips in the current palm oil rally. They don’t want to be caught off guard.”

In the Rotterdam cash market, palm oil was up 11 percent in August, while its discount to rapeseed oil has widened to more than $175 a metric ton from an average of $75 in the second quarter, making palm oil a cheaper substitute.

“The law of economics will pull the cheapest oil into the European food market and palm oil’s widening discount to rapeseed makes that happen,” said Dorab Mistry, head of trading for Indian company Godrej’s international arm.

European buyers may have to push environment issues linked to palm oil on the back burner as they struggle with lower domestic supplies, although top importers will be unwilling to take shipments from companies accused of destroying rainforests to expand palm estates.

“For major consumers like Germany sustainability is important, but we are going to see increased flows of palm oil as there are not enough edible oil sources,” Standard Chartered analyst Abah Ofon said.

“We continue to be bullish on palm oil as we feel global consumption of edible oils is going to outstrip supplies in the coming year.”

Environmentalists say palm oil’s use in biofuels has triggered a land grab at the expense of rainforests and peat lands — a campaign that largely limited its use in the sector.

Rapeseed oil is mostly channeled to biofuels, leaving palm oil for the food sector, and green groups such as Greenpeace have persuaded Unilever and Nestle to scrap supply contracts with some planters.


Reuters