Prices of crude palm oil futures have crashed to five-year lows on concerns of a global edible oil supply glut and growing fears that Chinese buyers could default on purchases if the steep falls persist.

Prices broke the psychological RM2,000 ($800) mark in April and are now at around RM1,976 per tonne for contracts for November delivery.

They last breached the RM2,000 level in March 2009 in the wake of the global financial crisis and a surplus in edible oils.

The new price slide is of major concern to Singapore firms like Wilmar International and Golden Agri-Resources, which are among the world’s leading producers of palm oil.

CIMB analyst Ivy Ng noted in a report this week that the price fall is steeper than expected and is due mainly to a build-up of bearish factors, including the prospect of bumper harvests of soya bean in the United States and rapeseed in Europe and high sunflower oil output in the Ukraine and Russia.

“The farmers in these regions are likely to be aggressive sellers due to economic uncertainty in their regions,” Ms Ng said.

Production of crude palm oil is expected to peak next month or in October, which could lead to a build-up in oil supplies in Malaysia and Indonesia if exports remain poor.

Palm oil exports from Malaysia slipped in the first seven months of this year due to weaker demand from China, Pakistan and the US.

Buyers have turned cautious following the steep fall in prices and the prospects of ample supply.

In addition, some buyers from China, the world’s second-largest importer of crude palm oil, with 14 per cent of global imports, are having difficulty obtaining letters of credit as banks clamp down on funding for commodities.

The curbs follow investigations into fraudulent commodity financing involving false receipts at Qingdao, the world’s seventh-largest container port.

“This, coupled with the relatively elevated palm oil stocks at China ports, is slowing demand from one of the biggest (crude palm oil) consumers,” Ms Ng said.

“We are of the view there are rising default risks due to the recent sharp correction in prices.”

Palm oil suppliers are also not being helped by the strength of the Malaysian ringgit and the relative cheapness of soya bean oil, Ms Ng added.

CIMB has maintained a neutral rating on the plantations sector, forecasting that prices are likely to stay weak in the near term until market players have priced in all the negative developments.

The brokerage also warned that prices could decline by a further RM100 to RM200 per tonne in the short term due to potential speculative selling.

“We predict that the price correction could go on for at least another month, and prices could bottom in late September/October and rebound in late fourth quarter,” said Ms Ng. “Our preference lies with planters that offer strong output growth prospects, like First Resources, to partially offset price declines.

“Plantation companies which trade at rich valuations and whose share prices have outperformed their peers, like IOI Corp, may succumb to profit-taking.”

DBS Group Research maintained a “hold” call on First Resources in a note this month, saying there may be significant earnings recovery in this half of the year on seasonally higher volume.

“Yet we do not anticipate near-term catalysts that would propel the counter’s share price above our target price (of $2.14).”

First Resources shares were down three cents at $2.02 yesterday.