Vegetable oil may cool on excess supply

The global vegetable oil market is at the crossroads. The short-term fundamentals are weak, with consumption lagging behind production and stocks rising at the origins.

Prices seem to have no upside in the next two-three quarters because of anticipated rebound in production of palm oil as well as major oil bearing crops in the northern hemisphere.

Large crops of soyabean, rapeseed and sunseed are expected to be harvested by September 2014.

However, the key to market direction in 2015 will be El Nino, the weather phenomenon that triggers acute dry conditions in South-East Asia and lower-than-normal monsoon rains in India.

Palm and other oils are currently fighting for market share as production of all oils has been rising.

Palm oil is usually quoted at a price discount to soft oils and is therefore able to garner a bigger share of trade.

However, the usual average differential of $150 a tonne between palm and soft oils has currently narrowed to about $80/t with abundant availability of the latter.

This narrow price spread means consumers have a choice and substitution is happening at the expense of palm oil.

Going forward, the biggest downside risk to palm prices is a potentially bumper crop of soyabean in the US in the coming months, over and above large supplies currently available from Brazil and Argentina.

It is evident that the edible oil industry is oversupplied at present.

With demand conditions remaining weak, an aggressive build-up of palm oil inventories at the origins — Indonesia and Malaysia — may be nearly unavoidable.

To regain market share, palm oil prices will have to be adjusted down relative to other oils. Crude palm oil is currently traded at Ringgit Malaysia 2,500 a tonne and has the potential to fall by 5-6 per cent in the next quarter. At the same time, the biggest upside risk to palm oil prices is El Nino.

The weather phenomenon has not struck yet; but experts assert it could strike sometime in the second half of this year.

Again, the timing and intensity of El Nino will determine palm oil production growth prospects but the impact will be felt only next year.

So, in the current scenario of looming oversupply of edible oils and weaker demand (summer season in the northern hemisphere usually slows vegoil consumption growth), prices will have to correct lower in the near term despite the threat of El Nino, which will impact production later in 2015.

An interesting feature is that whenever El Nino strikes South-East Asia, North America enjoys excellent weather conditions that boost spring-planted crops.

India is the market everyone is watching. Import volumes have clearly slowed down in recent months.

The first six months of oil year (November 2013 to April 2014) saw arrivals aggregate to 50.7 lakh tonnes versus 51.4 lakh tonnes during the corresponding period in the previous year.

The share of palm group of oils has declined to 37 lakh tonnes versus 43 lakh tonnes in the previous year while the share of soft oils (mainly soya and sun oils) has increased sharply.

India has, of course, harvested a large crop of groundnut in kharif season and rapeseed in rabi season.

It is highly likely that Indian importers are waiting for further price correction in palm oil before making large-scale purchase commitments to meet the festival demand that should kick in by August.

Softer palm oil prices and a firming rupee (making imports less expensive) make up a good mix for Indian consumers. The onset and progress of the south-west monsoon will also have a bearing on edible oil prices.

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