Commodity Analysis

Gains in palm oil could be short-lived

Prerna Sharma Singh | Updated on September 22, 2019 Published on September 22, 2019

Waning demand from India, China and the EU are likely to cap the price gain

The edible oil segment witnessed notable gains in August, with palm oil being the top performer in the domestic commodity market. It outperformed at the Bursa Malaysia Derivatives (BMD) global exchange, hitting a six-month high of 2,263 Malaysian ringgits a tonne, mainly due to output concerns and robust demand.

The current hardening of crude oil prices due to the attack on Saudi facilities has compensated, to a certain extent, for the losses caused by the hikes in Indian import duties on Malaysian palm. However, the situation in Saudi Arabia is expected to normalise over the next few days. In the near term, squeezed supply and ongoing festival demand are likely to provide underlying support to palm oil prices.

However, high stocks in India, the EU’s strict policy regime for phasing out palm oil, and China turning softer on its import of American soya (a substitute of palm oil) are likely to cap the price gain.

India, the spoilsport

India is the world’s largest consumer, accounting for one-fourth of the global palm oil demand. It imports more than 90 per cent of its requirements from Malaysia and Indonesia.

On September 5, India raised import tax on refined palm oil from Malaysia to 50 per cent from 45 per cent — applicable till March 2, 2020 — to cut import and support the domestic refining industry. This increases the duty differential between crude and refined palm oil to 10 per cent compared with the earlier 5 per cent, and also brings the imports of Malaysian refined palm oil on par with the other suppliers’.

India imposes 40 per cent tax on crude palm oil and 50 per cent on refined palm oil; but since January 2019, shipments of refined palm oil from Malaysia have attracted 45 per cent import duty under the Malaysia-India Comprehensive Economic Cooperation Agreement. No wonder, Malaysia exported 727 per cent more refined palm oil to India in January-June 2019 — 1.57 million metric tonnes (MMT) against 0.19 MMT for the same period in 2018.

Helped by preferential duty, Malaysia has now become the biggest supplier of palm oil for the Indian market.

However, higher imports (month-on- month) and restocking at ports have resulted in accumulation of heavy stocks. That, together with the end of preferential treatment to Malaysian palm products, hints at weak demand ahead.

Recently, China decided to exclude imports of US soyabean from additional trade war tariffs. Consequently, increased imports of US soyabean will reduce imports of palm oil.

The EU has already started reducing palm oil imports (month-on-month basis) to abide by the new EU law that aims to phase out the use of palm oil based biofuel by 2030.

With reduced demand from India, China and the EU, palm oil stocks are expected to rise in the coming months.

According to cargo surveyor agency Societe Generale De Surveillance (SGS), Malaysia’s palm oil exports for September 1-10 already showed a dip of 29 per cent on month to 337,570 tonnes.

A surge in export and the slowdown in palm oil production reduced Malaysian stocks by over 10 per cent to 2.25 MMT by August-end 2019, compared with the previous year. Apart from India giving preferential market access to Malaysia, China, too, has relaxed quota restrictions on palm oil imports from Malaysia and Indonesia. An outbreak of African swine flu in China also reduced its soyabean (oil) demand and increased palm oil demand — Indonesia posted a 50 per cent jump in palm oil exports to China in June.

As per the Malaysian Palm Oil Board, the production of palm oil rose 4.6 per cent over the previous month to 1.82 MMT in August. Though the output rose due to maturing plantations, the pace slowed down amid dry climatic conditions. Drought-like conditions prevailing in both Malaysia and Indonesia are likely to reduce the palm oil output more in 2020 than in 2019.

Increased biodiesel demand in Indonesia (mandated 20 per cent biodiesel blend and with plans to achieve 30 per cent by 2020) due to tighter fuel standards has reduced the stocks in the country.

Outlook

Low stocks, hardening crude oil prices, robust biodiesel requirements and India’s festival demand are expected to provide some support to palm oil prices. However, waning demand from India, China and the EU, resulting in higher stocks are expected to suppress prices more, and restrict the upside in palm oil prices.

The writer is co-founder, Director, and Head of Agriculture, Food, and Retail at Indonomics Consulting.

Published on September 22, 2019
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