Raw Input. A slippery slope for palm oil

Recent developments in the global vegetable oils market have provided a likely direction for palm oil prices in the first quarter of 2015.

A rebound in global oilseeds and vegetable oil production for two years in a row — 2013 and 2014 — has resulted in a market surplus. As a result, the global inventory of four major oils — palm, soya, rapeseed and sunseed — stands expanded. Palm oil has shown the highest level of inventory increase. Malaysian stocks have risen above the psychological level of two million tonnes. Additionally, given the surplus situation, speculative capital has stayed out of the market and remained in the sidelines.

Despite initial apprehensions about the adverse effects of El Nino, which triggered a rally earlier this year, world palm oil production in 2013-14 is up 3.5 million tonnes to a new high of 63.3 million tonnes. This was the result of new plantings between 2005 and 2011. Those young trees have now matured into a robust high-yielding phase. These factors have seen crude palm oil prices drop some 15 per cent in recent months. In taking a call on palm oil price trends, the focus is invariably on the world’s largest producers and exporters, Indonesia and Malaysia.

Market participants seem to overlook developments in other origins such as Thailand (2.2 million tonnes) and Columbia (one million tonnes). These smaller producers, however, are becoming increasingly important to the global equation.

Apart from output this year, other key drivers of palm oil prices are demand for biodiesel, crude oil prices, weather events, currency dynamics and the outlook for other soft oils.

The price differential between crude palm oil and soft oils that used to be in the region of $150 a tonne is at just half that level currently. For palm oil to retain market share, its discount to soft oils should continue to remain high.

The outlook for soyabean oil, in this context, is turning positive. Dry conditions faced by Brazil in October are causing some anxiety about soyabean plantings, particularly the yield. One can expect supply response to prices.

If the apprehended supply response were to combine with some adverse weather event, it will lead to tightness in soyaoil prices, which will also affect palm oil. Crude oil prices have considerably softened in recent weeks. Geopolitical tensions seem to have eased somewhat.

For crude, output expansion and demand slowdown have combined to keep prices down. If the current price levels of crude oil sustains, it would be negative for palm oil, as diversion for biodiesel will slow.

At the same time, palm oil will enter the biological down-cycle in 2015 which, in turn, means output growth may not be as healthy as in the previous two years. This will lead to a drawdown in inventory over time.

Overall, the palm oil market is likely to face several pulls and pressures in the coming months. If weather in South America improves in the coming days, the price rally seen in October will peter out.

But other factors remaining unchanged, over the next four months, crude palm oil is likely to trade in a range of 2,150-2,350 Malaysian ringgit a tonne. After March 2015, prices may look up to 2,300-2,500 Malaysian ringgit levels.

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