Commodity Analysis

Crude palm oil heats up

Parvatha Vardhini C | Updated on March 10, 2018 Published on September 04, 2016

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Lower production and improving consumption aid recovery in prices

After touching a multi-year low of about 1,800 Malaysian Ringitt (RM) a tonne in late August 2015, crude palm oil (CPO) has been on a rebound over the last one year. Despite some volatility, prices have moved up by 55 per cent since then to around 2,800 RM a tonne now. The MCX spot price of CPO in India has mirrored this trend. From around ₹360 per 10 kg a year ago, it has moved up to about ₹560 per 10 kg now.

Malaysia and Indonesia account for almost the entire global production of palm oil. Hence, lower production in Malaysia is one reason for the stiffening of prices. The heating up of demand as consumption improves on the part of big importers such China and India is another. This versatile vegetable oil is used as inputs for a range of products — from cosmetics to confectionery, foods, soaps, detergents and bio-diesel.

Reversal in trend

The trend of rising prices of CPO seen in recent times comes after a hiatus of four years. CPO prices touched record highs in 2011, crossing 3,000 RM a tonne. Strong demand from China, India, Turkey and South Africa, combined with tight global supplies of soyabean oil and palm oil, supported prices through 2011.

Indonesian crude palm oil production closed 2010 with a production rise of just 1 per cent at 14 million tonnes. Similarly, Malaysia’s production showed a drop of 3 per cent in 2010 over the previous year. Thanks to these factors, the average export price recorded by Malaysian producers in 2011 was the highest ever at 3,219 RM a tonne.

But the next year onwards, prices began cooling off. A build-up in the stockpile and a drop in demand from countries such as Egypt, Pakistan and the Philippines sent prices sliding in 2012. Average price dropped to 2,764 RM a tonne that year. Besides, China, among the largest importers of palm oil, increased imports of soyabean oil instead. While a recovery in demand and a redesigning of export duty structure in Malaysia in early 2013 raised some hope, it turned out to be just a flash in the pan. Average price fell to 2,371 RM a tonne in 2013.

Weaker soyabean oil and rapeseed oil prices during that year added to the bearish sentiment. Things did not change in the next two years either.

A 1.5-2.5 per cent increase in production in 2014 and 2015 amidst fall in demand from China and continued weakness in soyabean/rapeseed oil prices saw average CPO prices dip to 2,153 RM a tonne in 2015. But the tide has changed in the last few months.

A sharp fall in production so far in 2016, thanks to the dry spell due to the impact of El Nino, has triggered a rally in Malaysian CPO prices.

Data from the Malaysian Palm Oil Board shows that production in January-July 2016 stood at 9.17 million tonnes (MT), lower by 15 per cent from the same period in 2015.

Demand in major markets has also heated up. According to official reports, China’s palm oil inventory is now at about three lakh tonnes, the lowest since 2010.

Demand in both China and India is expected to remain strong ahead of the festival season in the second half of the year. Besides, Indonesia’s biodiesel mandate is also fuelling demand and hence, a rally in CPO prices.

What’s in store?

CPO prices could hold up, as supply is expected to continue to be tight in 2016. The ‘Food Outlook’ of the UN Food and Agriculture Organisation released in June 2016 expects the global output of palm oil to shrink for the first time in 18 years, after the prolonged El Nino-related dryness that hit South-East Asia this year.

Reports available in the public domain peg expected production of palm oil in Indonesia at 31 MT in 2016, as against 32.5 MT in 2015.

Malaysian palm oil output is also expected to drop below 19 MT in 2016 compared to 19.96 MT in 2015.

However, global soyabean production for this season is currently forecast at 314 MT. This is down 1.8 per cent from last season’s historic high, but it is still the second-largest harvest ever.

The output of the US, among the biggest producers, is pegged at 107 million tonnes, almost identical to the all-time record of the 2014-15 season.

This may keep soyabean oil prices benign. A narrowing of the premium of soyabean oil over CPO as a result of the bounty could shift some of the demand to soyabean oil. This could arrest any sharp increase in CPO prices.

Published on September 04, 2016

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