Palm oil prices to remain soft

Prerna Sharma | Updated on March 18, 2018

Higher supplies from Malaysia and Indonesia add to the bearish sentiment

Palm oil, which is used in almost everything right from cosmetics to snacks, is facing difficulty in establishing itself as a healthy oil and dismantling barriers to trade, leading to build-up of massive stocks.

The year started with the EU voting in favour of banning the use of palm oil in biodiesel by 2021. That was followed by India hiking import duties on palm oil significantly two months later. Apart from the trade hurdles, the higher supplies from Malaysia and Indonesia, which together contribute around 90 per cent of the total world supply, have further added to the bearish sentiment.

High stocks to continue

Palm oil output in Indonesia and Malaysia is expected to climb to new highs in 2018, to 37.8-38.8 million tonnes (mt) (36.8 mt in 2017) and 20.5-20.7 mt (19.9 mt in 2017), respectively, with expected recovery in output (compared to El Nino-stunted 2017-levels), as more trees reach the maturity stage.

Palm oil stocks in Malaysia have been moving at around 2.5 mt plus/minus 0.5 mt since the start of marketing year 2017-18 (October-September) and by February ’18 were at 2.478 mt, suggesting that prices will likely remain subdued. The historical trends indicate that prices remain steady if the month-on-month stocks lie in between 1.5-2 mt and bearish with stocks exceeding 2 mt while bullish below 1.5 mt.

With the aim to shore up falling palm oil prices and cut stockpile (nearing a two-year high), Malaysian government suspended export duties on palm oil for three months starting from January 8, which was 5.5 per cent.

However, a stronger ringgit, surprise trade barriers, expectations of rising production prospects, high stockpiles and large supplies of crops from other edible oils (especially soyabean, rapeseed and sunflower) negated the effect of export duty suspension and the prices remain flat to bearish in the current year after a strong performance in 2017. In future too, the pressure of high stockpiles seems unlikely to end due to modest export numbers.

The latest export data for March 1-10 reveals a fall of 19.3 per cent in the export of Malaysia’s palm oil products to 3,39,931 tonnes, mainly due to low shipments to China that declined 33 per cent month-on-month while export to India rose by 56 per cent in February on summer season demand.

Due to India’s recent hike in import duty to 44 per cent from 30 per cent on crude palm oil (import duty on refined palm oil is up 54 per cent from 40 per cent), importers are seeking cancellation of 1,00,000 tonnes of crude palm oil cargoes. That is likely to keep April’s export figures substantially lower.

This comes at a time when the suspension of export tax by Malaysia is due to be lifted on April 7 and the seasonal production recovery picks up from March (production fell for the fourth straight month in February).

The global benchmark Malaysian palm oil futures dipped to their lowest in a year-and-a-half at 2,368 ringgits when India raised import taxes.

Palm oil is likely to face competition from the huge supplies of other competing edible oils, limiting any potential price rally. The excess production of soya oil has narrowed its premium to palm oil, making consumers switch, and thus, dampening the demand for palm oil.

Silver lining

In this gloomy scenario, there are a few factors that can provide a little upside to palm oil prices in the near term.

Ramadan season-led increased buying (due in mid-May) and the steady crude oil prices can aid bearish palm oil prices. Crude oil prices have risen over 40 per cent since the second half of 2017, as a result, the palm oil-crude oil spread has been squeezed constantly in the last few months, triggering the diversion of buyers towards palm-biodiesel as a fuel replacement.

The other price supporting factor would be bigger Indonesia biodiesel mandate as the country is considering expanding biodiesel subsidies (with a minimum 20 per cent bio-content) to cover consumption of palm oil-blended fuels, which was previously available only to the power sector. The world’s usage of vegetable oils for bio diesel grew by 3 million tonnes in 2016-17 and that was mainly due to increases in Indonesia.

The ongoing China-US rift may result in more demand for South American soya bean and South East Asian palm oil.

The severe drought-impacted disruption in Argentina’s soya bean production can wipe out 13 million tonnes of soya bean from the country, providing support to soya oil prices and, in turn, palm oil. The market is also expecting that the Malaysian government will extend the suspension of export tariffs till August as palm oil inventories are unlikely to fall below 1.5 million tonnes, the target set by them.


Palm oil prices may rise to some extent in the immediate term due to the above mentioned factors.

However, the prices look likely to weaken from May or June onwards on improved supply prospects.

Overall, prices are expected to remain inherently weak for the whole year unless some major boost in demand happens.


The writer is vice-president and head of agriculture, food, and retail at Biznomics Consulting

Published on March 18, 2018

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