The Hindu Business Line : Palm oil prices set to correct lower

Mumbai, Aug. 23 From the dizzy heights of recent months, the palm oil market has come under downward pressure in the last couple of weeks, with prices declining by about 10 per cent. Going by demand-supply fundamentals, there seems to be considerable downside left to the market.

Bio-diesel demand

The market had risen to multi-year highs on the back of strong bio-diesel demand. Speculative funds too played a role in keeping the prices strong, in addition to producers keen to support prices whenever they looked to soften.

Clearly, the price performance was not commensurate with demand-supply fundamentals, and the market had gathered speculative froth.

The question, therefore, is: When will fundamentals catch up? Latest Malaysian production numbers suggest that in August crude palm oil output is set to register a sharp rise, perhaps as much as 30 per cent month-on-month. About 1.6 million tonnes (mt) is the estimate doing the rounds of the market.

September, too, is expected to be a month of high production. We have also found in the last 2-3 years the so-called peak season that usually lasted till September extended beyond that. There is nothing to suggest 2007 will be different.

Slowing exports

Notwithstanding continued demand for food and fuel, exports of palm oil are slowing. High prices have resulted in demand compression in price sensitive markets such as India.

The production and export trends suggest the imminent build up of an expanding inventory. Indeed, the 20-mt inventory projected for the year-end may actually materialise even earlier, according to some market watchers.

With oilseeds harvest only weeks away in major northern hemisphere origins such as the US, China and India, international traders have begun to look at supplies for the next season. Approaching harvest followed by actual arrivals of harvested crop would exert a downward pressure on international oilseeds and oils prices in the last quarter of the year.

The global vegetable oil market needs a trigger to start moving down.

The question simply is the timing: when will the trigger manifest itself. From the current levels of sub-2400 ringgits a tonne for crude palm oil, the market runs the downside risk of anything between 10 per cent and 15 per cent.

‘Talk the market up’

Meanwhile, concerted efforts by industry representatives to ‘talk the market up’ are evident. Brisk demand from major importers of palm oil as food and as energy by others is being highlighted in support of prices. Another industry major asserts prices will be in RM 2,300-2,400 a tonne range by the year-end.

For how long producers can beat market fundamentals remains to be seen.

Funds are ruthless players. They have no sympathy or love for any particular commodity. They will exit the market with neither notice nor hesitation. The producers on their part would of course do their best to support a falling market; but eventually the market will rule supreme.

Not below MYR 2,000

Admittedly, crude palm oil prices may not fall considerably below the psychological level of 2,000 Malaysian ringgit a tonne given the demand strength.

But to continue to expect the market to rule 15-20 per cent above the level, despite glaring fundamentals, is likely to prove exaggerated and unsustainable.

In this scenario, India may have to rework its tariff structure as and when palm oil prices decline towards RM 2,000 a tonne level. Instead of raising the basic customs duty, it would be prudent to first raise the tariff value to reflect the market price.

A slight weakness in rupee should also be taken into account.