The Hindu Business Line : Low prices may force non-food use of palm oil

BIO-FUEL is the flavour of the times. With crude prices riding high and prospects of correction looking remote because of supply constraints, diversion of vegetable oil for production of bio-fuel makes commercial sense, with attendant environmental benefits.

Countries such as Malaysia, the US and Brazil are said to be investing heavily in research to gradually make bio-fuel an alternative to crude oil. Ironically, interest in bio-fuel is accelerating, not so much because of any great concern for the ecology, but because global vegetable oil prices have been continually softening in the wake of record production (mainly, soyabean and palm oil) in 2004-05, rising inventory and consumption trailing supplies.

In recent years, non-food use of vegetable oil, especially in bio-fuel, has been rising. In 2003, as much as two million tonnes of vegoils — mainly rapeseed oil in Europe and soyabean oil in the US — were diverted for such use.

Now, major producers are all talking about increased non-food use of this renewable resource. Currently, palm oil stocks are in excess of 1.5 million tonnes. Crude palm oil market has dipped below the psychological RM 1300-a-tonne mark. There is renewed talk of diversion of palm oil for bio-diesel and replanting of old palm trees. Ironically, palm oil producers are not happy with the current market conditions and are trying to do everything within their capacity to `talk' the market up.

It was not long ago that palm oil market had seen a long bearish phase spread over two years when prices crashed below even 1,000 Malaysian ringgits (MYR) a tonne. When one considers the fact that the cost of production of palm oil is not over MYR 700 a tonne, the extent of premium palm oil has been enjoying will be evident. After getting used to prices above MYR 1,500, now even MYR 1,300 is made to appear as very low. However, contrary to belief, the threat of diversion of palm oil for bio-diesel and replanting of old trees is unlikely to impact the market in any significant manner.

These talks were heard three years go when the market was weak. The current fundamentals point to a soft phase in global vegetable oil prices at least until planting of the next oilseeds crop in May/June in the northern hemisphere and assuming normal weather in South America in the coming weeks.

What could potentially give an upward thrust to the market is the soyabean rust issue. The disease has been found in at least three states in the US. While the manner of and extent to which it would affect the next US soyabean crop remains to be seen, not many are sanguine about the size of the next crop. Oilseed planting and progress of crop in China and India would also need to be watched.

Meanwhile, the Malaysian Prime Minister, during his visit to India in December last, called for a free-trade agreement (FTA) between the two countries. There already are rumblings against the proposal. No doubt, preferential access to Malaysian palm oil will give a boost to bilateral trade between the two countries; but Indonesia's palm oil interests may be affected. Also, the proposed FTA would pose a threat to exporters of other oils such soyabean oil to India.

It is, of course, unclear at this point in time what the view of the Indian government is on FTA with Malaysia; but policymakers have to think through issues and ramifications. Domestic oil palm efforts too have to be boosted. It would, no doubt, be in Malaysia's interest to capture the burgeoning Indian palm oil market. The key question is whether India would leverage its import power to drive a long-term supply arrangement at prices on a `cost-plus' basis.

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