Palm oil likely to head further south on slack demand

After having declined over 20 per cent so far in 2023, palm oil prices will likely decline more on slack demand before staging a partial recovery in the second half, traders and analysts say.

“...prices will be pressured by continued soft import demand from Mainland China and India,” said research agency BMI, a unit of Fitch Solutions.

Between January and March, China imported one million tonnes (mt) of palm oil (and palm oil fractions), up considerably over imports of 0.3 mt during the same period in 2022. But it was below imports at 1.3 mt during the same period in 2019.

Many pressurising factors

“Palm oil market is under pressure due to many factors in the vegetable oil market. This is due to massive crop size and huge supplies for the US and Brazil. Sunflower oil price is currently below palm oil prices and demand seems to poor from many destinations, mainly India and China,” said Abdul Hameed, Director- Sales, Manzoor Trading in Lahore, Pakistan.

“Sunflower and soyabean oil prices are ruling lower. So why should we buy palm oil? Sunflower oil purchase is on a big way with the corridor of exports (in the Black Sea region) being cleared,” said BV Mehta, Executive Director, Solvent Extractors Association of India (SEA). 

On Wednesday, benchmark palm oil August contract on Bursa Malaysia Derivatives Exchange ended lower at 3,393 Malaysian ringgit (MYR) a tonne. At the start of the year, palm oil ruled at over 4,200 MYR. 

Price forecast

According to SEA, RBD palmolein is currently quoted at $890 a tonne and crude palm oil at $905, both cost and freight. Degummed soyabean oil is quoted at $940 and sunflower at $955.  

“We hold on to our average annual price forecasts for palm oil, maintaining our view that third-month palm oil futures will trade at a mean value of 3,800 MYR through 2023 before easing to an average level of 3,400 MYR through 2024,” BMI said. 

On a year-to-date basis, prices have averaged 3,872 MYR through 2023, it said. “Palm oil is ranging between 3,200 and 3,380 MYR due to excess supply in producing countries. Prices are near the bottom and the market needs some spark to rise in the short term,” Hameed said. The hot weather in Asia has been a deterrent with demand shifting from edible oils to seasonal fruits such as mango, he said.

India holding huge stocks

“Pressure on palm oil is also due to 3 mt of edible oil stocks. Global oilseeds output is 600 mt, up 16 mt this year,” said Mehta. 

Besides, India is holding huge stocks of uncrushed soyabean and mustard which provides a bearish outlook, he said.

BMI said in the immediate term, its outlook is not bullish since global soyabean harvest in 2023-24 is expected to be a record high. “Since the end of 2022, the soya-to-palm oil price premium has fallen by almost two-fifths, declining from $462 per tonne to $286 per tonne as of May 17, 2023,” the research agency said.

Demand in China is not picking up and traders in the Communist nation have shifted to soya. “Argentina is crushing the maximum to deliver their contracts early and this has also impacted demand,” said Hameed. 

El Nino factor

“Prices could drop further by $50 a tonne, though Indian farmers might be affected as a result,” said Mehta.

The low prices have resulted in India’s edible oil imports rise to 8 mt in the first six months of the current oil season to October and total shipments into the country could top 14 mt, he said. 

BMI said El Nino, expected to set in later this year, could result in prices rising. Last time when El Nino, which leads to drought in Asia, struck in 2015-16, palm oil production dropped 6 per cent.   

In the long term, palm oil prices could head below 3,000 MYR, the research agency said.   

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