The Hindu Business Line : Bio-diesel card being overplayed a little; cautious monitoring of market needed

Industry & Economy - Non-conventional Energy
Agri-Biz & Commodities - Oilseeds & Edible Oil

Bio-diesel card being overplayed a little; cautious monitoring of market needed

G. Chandrashekhar

Mumbai , Oct. 18

FIRM crude prices and no prospects of a major downward correction anytime soon have forced all major economies to examine cheaper alternatives, including bio-ethanol and bio-diesel. Demand for bio-diesel translates into a diversion of a part of global vegetable oil pool for energy purposes.

For the last four years, the use of bio-diesel - blending diesel with trans-esterified vegetable oil to the extent of 5-10 per cent - in the European Union and the US has been rising, with policymakers supporting the mover with tax breaks. With crude market threatening to breach the $70-a-barrel mark, exploration of cheaper substitutes has become all the more urgent and necessary.

For the global vegetable oil market, which by its very nature is volatile, the widespread expectation of the increased use of vegetable oil for bio-diesel purposes has sent bullish signals.

Experts and analysts are going overboard in projecting a massive diversion of vegetable oil from the existing pool for energy purposes and suggesting a huge increase in global vegetable oil prices.

The world usage of vegetable oil for bio-diesel purposes was an estimated 3 million tonnes (mt) or just under 3 per cent of the global vegetable oil production last year. Major users are the EU (mainly rapeseed oil) and the US (mainly soyabean oil). The EU usage of vegetable oil for bio-diesel has been rising at about 30 per cent annually in the last two years. The US utilises about 600,000 tonnes of soyabean.

With the crude market ruling firm for the last several months, there is a justified expectation of a larger diversion of vegetable oil for bio-diesel purposes in the year ahead. This has lent a firm undertone to global vegetable oil market.

On the production side, the world is likely to witness a healthy 4.0 mt of additional vegetable oil in 2005-06, following a forecast of higher oilseeds output and rising palm oil production. Demand too is likely to grow robustly, primarily for food purposes. Higher demand for bio-diesel would be a supplementary factor. With the current reckoning and the recent trends, it may be safe to assume that no more than an additional quantity of 1 mt may be diverted for energy purposes during the year.

The latest US Department of Agriculture (USDA) report has raised global oilseeds output to a new high of 385 mt (379 mt). Soyabean output in the US is revised upwards to 80.7 mt. Interestingly, crop size of Brazil is projected at 60 mt (51 mt) and for Argentina 40.5 mt (39 mt). If these crop projections are realised, the world will have enough oil to go around, including additional demand from the energy sector. Importantly, firm prices will raise oilseeds crush by around 5 per cent to make additional oil available to meet demand.

Therefore, while prices are expected to remain firm, the vegetable oil market is unlikely to see a bull-run as projected by some analysts. Already, prices of major oils — soyabean oil and palm oil — are at a relatively high level.

Crude palm oil is around 1,450 Malaysian ringgits (MYR) a tonne ($375-380 a tonne), soyabean oil is available at $475-480 a tonne, both at the origin.

There is still an upside for the vegetable oil market, but the upside potential is limited. In the short run, one can expect crude palm oil to trade between MYR 1,450 and 1,550 a tonne, which on occasion may cross MYR 1,550. But this is unlikely to sustain for long, given the potential of supplies to creep up. The same goes for soyabean oil, which can potentially improve by 5-6 per cent ($20-25 a tonne).

Domestic crop harvest in importing countries (such as India) will also slow down purchases by importers during the next 6-8 weeks.

A bull run in the market — palm oil crossing MYR 1,600 a tonne or soyabean oil moving up to $550 a tonne — can be safely discounted, notwithstanding higher demand from the energy sector.

The only factor that can catapult prices to a higher trajectory is South American weather. If it is unfriendly, vegetable oil prices could shoot up from December onwards once the crop prospects become suspect. Thus, any upward market movement would be the result of weather aberrations and not bio-diesel demand as sought to be projected.

It makes commercial sense for countries that are large producers and net exporters of vegetable oil to create a psychosis of shortage of vegetable oil to prop up prices. But available data suggest that there is no significant demand-supply mismatch that can seriously impact prices.

The condition of India's rabi oilseed crop size would also make some difference. Currently, it is too early to talk of the crop size. But the market does know that 15 lakh tonnes of rapeseed/mustard stocks are lying with the procurement agency for crushing. A bumper crop of cotton (nearly 255 lakh bales) is expected to make available 75 lakh tonnes of cottonseed. Firm prices will encourage crushing.

It is possible that the bio-diesel card is a little overplayed. Caution is necessary in taking long positions. Continuous monitoring of market conditions would be beneficial in tracking price-sensitive changes.

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page