Palm oil prices are once again under pressure with rising production, expanding inventory at the origins and slowing demand in major consuming markets.

Rivalry between two of the world’s leading producer-exporters – Indonesia and Malaysia – to retain market share through competitive and often retaliatory tariff reduction has exacerbated the situation even as falling crude oil (mineral oil) prices make diversion of palm oil for biodiesel less-viable.

Higher output

Despite market-moving noises over dry weather conditions earlier this year, Malaysian palm oil production is set to be higher than initial expectation and is set to exceed 20 million tonnes (mt) this year. The USDA has forecast Malaysian production at 20.2 mt for 2013-14 and 21.3 mt in 2014-15. The peak production season that started in April will possibly spill over into November.

Market observers are now convinced that the keenly-watched Malaysian palm oil inventory, a key market driver, may well touch 2.5 mt, levels last seen in 2012.

Slack demand

Falling global vegetable oil prices, under the lead of soyabean oil, is pulling the entire vegoil complex down.

Palm oil’s rising inventory is coinciding with the harvest of bumper soyabean crop in the US followed by an anticipated large crop in South America.

No wonder, the price spread of palm oil with other oils has narrowed to $70 a tonne making palm oil less attractive.

But this is not all. The demand side is not looking energetic. Demand from the biodiesel segment is weakening as crude (mineral oil) prices have drifted, testing $80 a barrel, affecting biodiesel economics. Demand in China, arguably the world’s largest importer, is weakening.

Price outlook

So, considering the supply-demand fundamentals, on current reckoning, the outlook for palm oil is weak.

Prices are unlikely to recover sharply from the present levels. If anything, palm oil prices will have to weaken further so as not to lose market share in the near-term.

The market would continue to hover around MYR 2,000-2,100 a tonne with extremely limited upside until the huge stocks are worked off.

However, some market participants are hopeful that demand will pick up momentum.

They point out that China’s stocks are low at about 600,000 tonnes while India would need to continue to import about 800,000 tonnes every month given the dwindling pipeline stocks.

But it is important to remember that India’s festival season is coming to an end and domestic oil will start to flow soon. R Ramamoorthy of AR Enterprises, a trade intermediary, summed up the situation saying, “the worst may be over for the palm oil market; while prices may not run up sharply, the downside is rather limited.”

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