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BL Research Bureau

Palm oil has become the latest item to join the bandwagon of plunging commodities, its prices falling by nearly 11 per cent over the last week to a 15-month low of about $700 a tonne. Prices of the palm oil complex are now down over 40 per cent from their peak in March this year.

This dramatic decline, combined with the fall in petroleum product prices over the past month, may bring considerable relief to makers of FMCGs, especially toilet soaps, as palm oil is a key input for manufacture of soaps. FMCG makers such as Hindustan Unilever and Godrej Consumer had already taken price increases on their soap portfolios over the past two quarters to compensate for rising input costs. As it unlikely that prices will be pegged down in the near-term to adjust for lower input costs, companies may be left with higher profit margins to plough back into promotional or new-launch activity.

The extent to which individual players are able to benefit from the recent decline in palm oil prices will, however, depend on their inventories of palm oil and the forward cover that they have already taken for their palm oil requirements. For those who have already locked into higher prices through physical stocks or forward contracts, the recent fall offers an opportunity to secure future requirements at much lower prices. These players may experience a time lag before lower input prices actually reflect in their profit margins.

A combination of factors has triggered the recent meltdown in palm oil prices. These range from a meltdown in crude oil (vegetable oil prices were stoked by bio-fuel demand) and soyabean oil prices (on higher production in the US) to expectations of higher output of palm oil in Malaysia over the second half of this year. This week’s fall in particular was sparked by fears of large Chinese and Indian buyers of palm oil seeking to re-negotiate import contracts at lower prices, due to an appreciating dollar.

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