The Hindu Business Line : Vegoil market reels under defaults on falling prices

In the last 4-6 weeks, overseas sellers and Indian buyers had entered into a large number of transactions at high prices - in the range of $1,100-1,200 a tonne.

However, in a short span of two weeks, the market has collapsed by nearly $250 a tonne.

The commodity particularly hit is crude palm oil whose rates have dropped precipitously.

From the April high of ringgit Malaysia (RM) 3,700 a tonne and July price of RM 3,500 a tonne, crude palm oil has dropped to about RM 2,750 a tonne at present. The current offers are at $850 a tonne.

letters of credit

Following the price decline, several Indian importers including some well known corporates, holding high priced contracts, reportedly did not open requisite letters of credit.

Overseas suppliers are now left holding purchase contracts and goods, but are unable to ship the goods in the absence of LC.

Many large plantation companies are already nursing unsold stocks and find the value of inventory considerably eroded. Malaysian crude palm oil inventory is burgeoning at over 2.2 million tonnes.

Seller-buyer standoff

Meanwhile, taking a cue from overseas advices, domestic prices too started to trend down. Widespread rains since July 25 have improved the prospects for oilseeds crops which contributed to the changed sentiment.

Importers and refiners who had made advance sales at high prices in the local market find local buyers not coming forward to lift the goods. There is now a stand-off between sellers and buyers.

Importers have already lost as much as Rs 125 crore-150 crore in the last 2-3 weeks as a result of collapse in market prices.

Some of the overseas suppliers are likely to drag Indian importers into arbitration for the default committed.

Market participants were generally tight-lipped about the extent of defaults and some refused to discuss names of defaulters.

The wholesale cash market in the country is unregulated and works largely on the basis of track-record and trust between sellers and intermediaries.

However, this is not the first time that such defaults have afflicted the market. It has happened in the past. There will surely be some give and take, and a compromise will eventually be arrived at, commented a broker.

Many traders get carried away in the bull phase of the market and fail to see correction coming.

The role of analysts in creating an unwarranted frenzy in the market is another factor to be reckoned with, remarked an industry insider.