Palm oil prices may come under pressure next year

There was some euphoria in the palm oil market recently when prices breached Malaysia ringgit (MYR) 2,600 a tonne for crude palm oil as wet weather triggered production concerns. But the rally was short-lived given the current and emerging market fundamentals. CPO prices have already declined to MYR 2,500 levels and are facing further downward pressure.

With the onset of new crop year (October-September 2013-14) market participants have begun to look ahead. Contrary to earlier reports, Malaysian palm oil production grew 3 per cent month-on-month and 2 per cent year-on-year even as October-end inventory recorded 1.85 million tonnes in line with market expectation.

In the crop year 2012-13 that ended in September, crude palm oil benefited from strong demand as supplies of other oils lagged. The situation is set to reverse. Driven by benign weather, a strong production recovery in the oilseeds complex is expected. Soyabean, sunflower and rapeseed oils will fiercely compete with palm oil for market share. Until a few months ago, palm oil was favoured on price consideration because of its attractive discount over soft oils. No wonder, palm oil demand grew faster at well over 10 per cent even when the world vegoils demand grew by a mere 3 per cent. It was indeed an unusual and anomalous situation. But it is beginning to change with supplies of all oils set to expand. If anything, the attractiveness of palm oil is considerably reduced now with the discount over competing oils narrowing. For instance, palm oil-soyabean oil price differential is currently as low as $100 a tonne (versus $300 a year ago) and with sunoil the differential is even lower at about $60 a tonne.

In 2013-14, with anticipated growth in supplies of soya, sun and rape oils around the world, palm oil risks losing market share. Consumption growth in palm oil is likely to trail that of other oils. The only way palm oil can retain market share is through substantial price discounts. No wonder, analysts hold underweight position on this sector. Tentative estimates for 2013-14 suggest world vegetable oil production will rise by seven million tonnes to a new high of 196 mt, while disappearance will marginally trail at 195 mt. Within this, world palm oil production is expected to rise 2.6 mt to 58.7 mt, with Indonesia contributing almost entirely to the additional output, while Malaysian output may remain unchanged. Consumption or disappearance for the year is forecast at 58 mt. Also, the season has started with heavy opening stocks estimated in excess of 12 mt at the origins and destinations combined. November to February is a period when traditionally palm oil production slows. The biological up-cycle begins in April and usually extends till October. So, over the next three months, palm oil prices will remain relatively steady, but begin to soften from March 2014 when the effect of expanding production and South American soya oil supplies will begin to kick in. Major importing countries such as India and China are holding large stocks of palm oil.

Given the emerging scenario, one can expect crude palm oil to trade in the MYR 2,300-2,400 a tonne range until February, and decline to MYR 2,000-2,200 during April-June next year.

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