The Hindu Business Line : Palm oil may see further downward correction

Dipping trend
Funds had liquidated a part of their position as the market was seen overheated.
Demand-supply fundamentals continue to favour vegetable oils in general.

G. Chandrashekhar

Washington, June 30 Palm oil’s dream run of the past several months is likely to end soon, if buzz in the US and Canada is any indication. Crude palm oil (CPO) market had spiked to levels (over Malaysia ringgit 2,600 a tonne) not seen in recent past as a result of large diversion of the commodity to meet burgeoning bio-diesel demand.

Liquidation by funds

Over the last couple of weeks there has been a 10 per cent downward correction in palm prices (MYR 2,350/tonne). Funds had liquidated a part of their position as the market was seen overheated and ripe for correction. There is the strong possibility of a further slide if the US decides to act.

A large part of CPO import into the US (monthly average of a little less than 100,000 tonnes) is converted into bio-diesel and exported to Europe. In the process, the US exporter gets a hefty subsidy ($1 per gallon of bio-diesel exported).

Loophole

Trade representatives contend that the purpose of export incentive is to promote bio-diesel made out of US origin vegetable oils, including soyabean oil; but a loophole in the law has seen CPO walk away with the incentive.

It is believed that the law will be tightened soon so as to ensure that only US origin oils get the benefit. Should that happen, the palm oil complex will receive a jolt as a newly found important market may begin to dry up. Of course, palm producers in Malaysia and Indonesia can be expected to do their best to avoid a price collapse. They have the financial clout, having made enormous profits in the last three years. In any case, as the demand-supply fundamentals continue to favour vegetable oils in general, there may not be a collapse after all, but a further downward correction, perhaps, of another 10 per cent from the current levels, to reach close to MYR 2,000/tonne.

Economics

Clearly, CPO had begun to face demand compression at higher prices — above $650-700 a tonne — as the economics of bio-diesel production went haywire. So far, weather in major origins has been helpful for oilseed crops. Should concerns develop, it would arrest a price fall.

Large Indian purchases to meet upcoming festival demand during August-October are also likely to provide support.