The Hindu Business Line : Palm oil fundamentals point to price correction

Mumbai, July 29 The palm complex has enjoyed a dream run for last several months owing to spurt in bio-diesel demand, with prices touching record highs. It is generally recognised that demand-supply fundamentals did not support such high prices. Indeed, taking a cue from the soya market, speculative funds helped push the palm market to newer heights.

Revealing numbers

Where could palm market be headed from the current levels? A look at the Malaysian numbers and some prognosis of what can happen over the next few months is revealing.

Malaysia’s crude palm oil production for 2007 is projected at 15.3 million tonnes (mt), down from last year’s 15.7 mt.

According to Malaysian palm oil industry, the first-half production was slightly less than 6.7 mt. That should leave 8.6 mt as the possible production in the second half.

As of July 1, the stocks were an estimated 1.2 mt. Therefore, total supplies in second-half should be 9.8 mt.

It should be reasonable to assume average monthly export of 1.1 mt in the second half. Indeed, this does not take into account some demand compression that has already begun to be visible, in food and fuel segments both.

To err on the side of caution, even assuming a slightly higher export of 1.15 mt a month over next six months, export shipments would aggregate 6.9 mt.

Malaysia’s consumption

Malaysia’s domestic consumption is placed at 0.8 mt in second-half. If these numbers are realised, even if with minor changes, it should lead to a closing stock of a little over 2 mt by the year-end, a development that is fraught with implications for palm prices.

Confirming the general veracity and plausibility of these estimates, Mr A. Ramamoorthy of Hyderabad-based A.R. International, a well-known trade intermediary, told Business Line that he believed the palm market was poised for a corr ection.

“From a price perspective, I believe, the market is overdone and a correction is imminent because of the projected demand-supply numbers,” he said.

Once these numbers sink in, funds would be the first to liquidate and get out of the market. Of course, plantations companies who have enjoyed windfall gains in recent times, would surely try to stem the fall; but it may be difficult to beat the sentiment, experts said.

Indonesia has emerged as an equally large producer of palm oil.

Reliable data from the country are hard to come by; but on current reckoning, far from helping a price rise, the Indonesian situation can potentially contribute to a downward movement, according to experts.

India impact

Indian oilseeds crop conditions will also have an impact on the palm market. India imports about 30 lakh tonnes of palm oil. If the southwest monsoon plays out well, then the last quarter of 2007 may see some major reverses in vegetable oil prices.

Next four to six weeks are crucial. Weather conditions in the US and in India need to be watched closely. Whether a big correction in stock market across the world will spill over to commodity market also needs to be watched, Mr Ramamoorthy said.

Should the global vegetable oil market decline substantially, the Indian Government will be forced to review its basic customs duties and tariff values on edible oils.

Of course, there is nothing to prevent the government from raising the rate of duty. But a more mature response would be to revise the artificially low tariff values to reflect the market reality.