Crude palm oil (CPO) prices have firmed in recent days because of an unanticipated combination of weather concerns in parts of the world (mainly Brazil) and potential supply disruption, occurring at a seasonally low production time for CPO.

This has made the market somewhat nervous. However, a more dispassionate view of the emerging situation will show why the current price strength will not last long.

First, the biological yield cycle for palm oil could move from down-cycle to up-cycle as early as April-May. The peak production season usually lasts up to October-November. It will coincide with arrival pressure of record soyabean crop in Brazil this year, estimated at 88-90 million tonnes (mt), beginning March. This is despite recent weather noises following dry conditions, but Brazil experienced rains in soya growing areas mid-February which should help stabilise yields. In Argentina, soyabean crop is estimated at 52-54 mt.

Soya strength The recent strength in the soya complex has more to do with tightening US supplies even as the Brazilian crop is not fully ready for the market yet. Low US inventory, strong Chinese demand and limited sales by Argentina have all combined at this point in time. Prices are sure to weaken when Brazilian supplies commence. Also, Argentina will be forced to dispose of old crop to make space for the new harvest. After no growth last year, supplies of vegetable oils (mainly soya and sun) are set to recover this year. World availability will be comfortable; and inventories will be built.

Export demand hit These are the factors palm oil producers have to reckon with. Last year, CPO had to bear the burden of demand growth because of lower availability of other oils. Now, with a rebound in non-palm oil production, the differential between palm and other oils has narrowed to $70-90 a tonne versus $150 a year ago. So, palm oil export demand is likely to suffer with ample supplies of various vegoils as substitutes. For CPO to retain market share, its prices will have to turn lower. The current prices above Malaysian ringgit 2,600 a tonne are not sustainable for long; and can be expected to turn lower towards end-March.

Much was made of the Indonesian biodiesel demand. However, the country’s biodiesel target was recently lowered by 20 per cent from 6.6 mt to 5.3 mt for 2014-15.

Observers assert that the economics are not attractive for supplies. Worse, the response to recent biodiesel tender in Indonesia was tepid. In any case, higher Indonesian demand is neutralised by lower demand from EU. The EU levies heavy anti-dumping duty (12-20 per cent) on Indonesian biodiesel. So, this market can be treated as nearly closed. It is of course possible that instead of biodiesel itself, EU may import CPO to make biodiesel; but narrow price differential with competing oils makes CPO less attractive.

World palm oil production in 2013-14 is set to rise close to 59 mt (56 mt) and then on to 62 mt in 2014-15. Disappearance in 2013-14 is likely to trail production by a million tonne, adding to closing stocks.

CPO prices have to move sharply down from the current levels and the correction could be anything between 15 per cent and 20 per cent.

Related Topics
comment COMMENT NOW