Commodity Analysis

Palm oil to find support after a dip

Prerna Sharma Singh | Updated on November 25, 2018 Published on November 25, 2018

Price-sensitive Indian buyers are waiting for a drop to enter the market

This year has not been good for the palm oil sector as it has lost more than 25 per cent of its value due to hikes in import duties by India (the top importer), escalating trade tensions between China and the US, and higher supplies from the top two palm oil-producing countries.

Further, the EU’s decision to phase out palm oil from its use as transport fuel by 2030 has dampened the sentiment. On November 14, the palm oil futures (Bursa Malaysia exchange) hit 1,965 ringgits a tonne, the lowest since August 2015.

Oversupply persists

Indonesia is expected to produce 39.8 MMT (million tonnes) of palm oil, while Malaysia is estimated to produce 19.6 MMT. As per Malaysian Palm Oil Board data, stocks at the end of October stand at 2.72 MMT, 7.6 per cent higher than previous month’s, while production rose 6 per cent to 1.96 MMT for the same period. The inventories are likely to swell further in the near future as output is expected to rise both in Malaysia and Indonesia due to seasonal uptrend of production and yields, with no positive signs of improvement in demand in the near future. The seasonal trend shows that output of palm oil reaches its peak in November-December before tapering off early the following year. As a result, palm oil stocks in Malaysia can exceed 3 MMT by December, while in Indonesia, it may breach 5 MMT.

Increased output in Indonesia and Malaysia has helped increase the world’s production of palm oil by nearly 4 MMT in 2018. However, the output growth may go up by only 2.5 MMT in 2019 on account of El Nino. This will support palm oil prices in the second half of 2019.

Palm oil production in Indonesia is expected to rise to 41.5 MMT in 2019, while in Malaysia, it is forecast to grow 2.5 per cent on year to 19.9 MMT.

As things stand today, crude oil may not give any fresh direction to palm oil prices. Saudi Arabia’s announcement to cut its oil production, the OPEC members collaborating to move prices up in December, and lower production in Venezuela could be offset by the US decision to allow top buyers such as China and India to continue buying Iranian oil for another six months. On the other hand, the ongoing trade tension between the US and China may dampen the growth prospects of the Asia-Pacific region, the major consuming market.

Weak export demand

The pace of exports of palm oil is not matching the increasing supplies from Malaysia and Indonesia. The latest export data show a decline of 20 per cent in October following weak demand from India and the EU, according to cargo surveyor SGS.

India is a price-sensitive market, but low prices failed to attract bulk buyers who were hit by the rupee fall and high import duties. India’s palm oil import decreased to 8.7 MMT for oil year 2017-18 (Nov-Oct) compared with 9.29 MMT shipped a year ago. Moreover, India’s demand for palm oil (cheapest source of edible oil) used for adulteration (mixing with costlier oils) is set to weaken due to its freezing property in winter. With the commencement of arrivals of kharif-sown oilseeds (soybean and groundnut) and increased crushing activities, the supply of domestic oil is going to improve, capping palm oil import. India’s soybean output is expected to go up this year on favourable climate and increased acreage.

A bumper soybean crop in the US and its reduced export to China due to the trade tension will put pressure on soybean complex, and thus on palm oil prices.

However, despite over-supply and timid demand, any sharp correction in palm oil prices is restricted due to a likely pick-up in demand from the bulk buyers waiting to enter the market after a dip in the price level. Also, the rumours of India reducing the import duty by 4 per cent to comply with the duty reduction commitment under ASEAN-India FTA, which is due in December, is expected to provide a fillip to the buyers waiting for some positive signal.

Increase in bio-diesel production — supported by the drive from Indonesia, Malaysia and Brazil to expand their bio-fuel usage — is expected to reduce the palm oil stocks.


In the near future, palm oil prices have room for some more downside owing to excess supply and waning demand, especially from India due to winter and high import duties. However, the price-sensitive Indian buyers are waiting for a dip to enter the market. This is expected to provide support to bearish palm oil prices, once the supply pipeline dries up with reduced production from the key producing countries (next year). As a result, palm oil prices may gain significantly.

The writer is Director and Head, Agriculture, Food and Retail at Indonomics Consulting.

Published on November 25, 2018
This article is closed for comments.
Please Email the Editor