Euro zone, China data drag palm oil to one-week lows

KUALA LUMPUR: Malaysian palm oil futures dropped to their lowest in a week on Tuesday as Europe's debt problems continue to fester and China reported slightly slower economic growth, raising concerns of slower commodity demand.

The market extended losses for a second day after Germany's finance minister cautioned on Monday that a definitive solution would not be reached at the Oct. 23 European union summit and Moody's warned France of a negative outlook.

Adding to the dismal economic outlook, China reported gross domestic product growth had slowed a little to 9.2 percent in the third quarter -- the slowest pace since the second quarter of 2009.

"It's all about the macro situation," said a trader with a foreign commodities brokerage.

"Although people will depend on palm oil as it is still the cheapest vegetable oil, the weak economic sentiment is hurting markets and prospects of expansion," he added.

Benchmark January palm oil futures on the Bursa Malaysia Derivatives Exchange settled down 1.4 percent to 2,835 ringgit ($919). Earlier in the session, the contract dropped to 2,817 ringgit -- the lowest since Oct. 11.

Traded volumes stood at 26,981 lots of 25 tonnes each, compared to the usual 25,000 lots.

Technicals did little to comfort. Reuters analyst Wang Tao said palm oil is expected to fall to 2,776 ringgit per tonne, as a long-term downtrend has resumed after a rebound from the Oct. 6 low of 2,754 ringgit.

The robust export trend is preventing the market from going far lower, traders say, as Chinese buyers are looking to restock after the Golden Week holidays in early October and India makes some last minute purchases ahead of Diwali this month.

Cargo surveyors reported up to an 11 percent increase in Oct 1-15 Malaysian palm oil exports from the same period a month ago and the market expected further growth.

"Ideally, if palm oil goes below 2,800 ringgit ... there should be some heavy buying coming in. Also, Malaysian crude palm oil becomes very attractive," said another trader.

Traders are turning to Malaysian crude palm oil after Indonesia, the world's largest palm oil producer, slashed its refined palm oil export taxes, making the crude grade expensive to ship out.

Even if more Malaysia crude palm oil gets shipped out, there could still be high stocks with production expected to continue growing well into the seasonal output peak in the last quarter of this year.

Brent crude futures fell below $110 on Tuesday on the China data, also dragging down prices of other vegetable oils that are used in renewable energy.

Copyright Reuters, 2011