Palm oil prices, which plunged nearly 2% to a two-year low on Monday, are poised to recover, commentators said – but differed on the timescale, with ANZ saying a revival may take until late this year.

Palm oil prices, as measured by the December futures contract in Kuala Lumpur, plunged 6.7% to 2,577 ringgit a tonne in early deals in Kuala Lumpur, the lowest for a benchmark lot since September 2010.

The drop was blamed in part on broader market factors such as a decline in crude oil prices, to which values of palm oil, as a biodiesel feedstock have a tie, and to economic concerns, especially in leading import markets such as China and Europe.

"We are seeing tensions between Japan and China," sparked by claims to the Senkaku islands, Ker Chung Yang, at Singapore-based Phillip Futures, told Agrimoney.com, flagging also continued concerns over eurozone debt.

Furthermore, elsewhere in the oilseeds complex, Chicago soybeans extended their losses on Monday, with the benchmark November lot falling below $16 a bushel for the first time in a month.

Risk of further declines

However, palm oil specific factors also played a part, with Malaysian inventories, which rose above 2m tonnes last month, expected to swell further in September as production approaches a seasonal high, Mr Ker said.

Standard Chartered on Friday noted that Malaysian palm oil yields had recovered from a soft start to the season to reach 1.69 tonnes per hectare in July, just above the five-year average. Yields were 13% below average in May.

And comments from an industry conference in India added further pressure, with respected analyst Dorab Mistry saying that there was a 50% chance of Kuala Lumpur prices falling to 2,300 ringgit a tonne in the last quarter of the year.

"Demand for palm oil in particular and for vegetable oils in general has been softer than expected in 2012," Mr Mistry was expected to say.

"[This is due to] much slower growth in the production of biofuels from vegetable oil and the difficult economic situation in developing countries, coupled with high prices," he said.

'Falling knife'

"When someone like Dorab Mistry says that, it is notable," Victor Thianpiriya at Australia & New Zealand Bank said.

Besides being a noted commentator, "he is a trader, and so it is in his interests to have higher prices".

Furthermore, Mr Thianpiriya flagged that as an extra depressant to prices, palm oil futures broke a key chart support level by breaking down through their 50% retracement level from their 2011 high.

"It looks pretty bearish for palm oil. I would not be trying to catch this falling knife," he told Agrimoney.com.

"I do not see the market recovering in the short term, unless you get something like weather problems in South America," on which oilseeds buyers are relying to, in an early-2013 harvest, replenish thin world stocks of oilseeds.

Bargain hunting ahead?

However, he forecast that the picture for palm oil prices could improve later in 2012 and heading into 2013, as pressure on the oilseeds complex from the US soybean harvest, and brings the segment's bullish fundamental factors into play.

Phillip Futures' Mr Ker forecast a more immediate rebound, as prices now at "pretty attractive levels" encourage bargain hunger.

"Declines in palm oil prices will likely boost purchases of the edible oil by India, the world's largest importer of such oils," he said.

"India's edible oil market is very price sensitive, with low income-earners generally opting for whatever oil is cheapest.

"I expect a return of futures back to the 2,700 ringgit-a-tonne level within this week.

Kuala Lumpur's December contract closed at 2,646 ringgit a tonne, a decline of 4.2% on the day.

'Demand will soon manifest'

On Friday, Standard Chartered cut its forecast for palm oil prices in the fourth quarter of 2012 by 250 ringgit a tonne, but, at 3,250 ringgit a tonne, the estimate is still relatively upbeat.

StanChart analyst Abah Ofon, saying that the crude palm oil market was "at a critical stage in the marketing year", said that while "so far, demand has been weak and inventories high, we believe there are emerging signs that demand is on the cusp of a recovery".

Besides forecasting firm demand from India, helped by a cut to import taxes, Mr Ofon noted a drawdown in stocks in China "at a time when exports to China are seasonally strong – partly on anticipated Chinese New Year consumption".

This decline "indicates that pipeline demand will soon manifest"