Insider View. Palm oil to weaken after slight uptick

Palm oil performed well in the oil year 2015-2016 (November-October) mainly because of El Nino-induced plunge in production for the first time since 1998, along with a significant reduction in yield.

Palm oil futures prices at the Malaysian exchange soared to 3,089 ringgits on November 11 on account of favourable exchange rate, pruned down production data, coupled with labour shortage for harvesting, and hardened soyaoil prices on increased Chinese demand. These gains were, however, limited by reduced export demand.

The USDA reports that global palm oil production will decline to 58.8 million tonnes (mt) in 2015-16 compared to 61.6 mt in 2014-15. It puts Malaysia’s palm oil production at 17.7 mt in 2015-16 against 19.8 mt in 2014-15. Similarly, Indonesia is expected to produce 32 mt in 2015-16 against 33 mt in 2014-15.

A significant decline in production has reduced the world palm oil stock closer to half. By October ’16, Malaysia’s palm oil stocks stood at 1.57 mt, down by 40 per cent on year. However, lower purchases by India and China caused Malaysian palm oil stockpiles to edge up in October compared to September.

Weak exports to China were mainly due to release of rapeseed oil stocks from state reserves while end of festival buying from India slowed down the imports. However, reduced production and fast depleting stocks will continue providing support to global palm oil prices.

Palm oil exports have started receding due to lower production, reduced demand from top buyers and narrow premium on soyaoil over palm oil, along with higher allocation of crude palm oil (CPO) for biodiesel. After a fall of 20 per cent (month on month) in Malaysian palm oil export in September, the export in October again dipped to 1.43 mt (lowest since July). Besides, November month showed an accelerated pace of decline of 14-15 per cent for the first 10 days of export.

Malaysia has decided to implement higher bio-diesel mandates of B10 (10 per cent palm product as bio-diesel) for transportation and B7 for the industrial sector starting December. If this is successfully implemented, government data says that it will lead to increase in bio-diesel consumption. However, Indonesia is expected to produce 2.4 mt of bio-diesel, 72 per cent up from the level of 2015.

The European Union is contemplating restricting palm oil imports on health and environmental grounds. If this happens it will be a big blow to Indonesia’s palm oil export demand as the EU accounts for 20 per cent of Indonesia’s palm oil export.

China’s release of 2.3 mt of old stocks of rape seed oil from its reserves has been one of the main reasons, other than subdued exports, for the restricted upside in palm oil prices. However, in 2017, some improvement in demand from China is expected. Further, the ringgit hitting a 14-month low at 4.4415 to a dollar (last Friday) will make Malaysian palm oil cheaper for foreign buyers.

India’s import dependence on vegetable oil has grown to over 75 per cent. However, its palm oil imports fell to 7.7 mt in November’15-September’16 against 8.42 mt a year ago, mainly due to reduced premium on soyaoil over palm oil. India reduced import duty on crude palm oil to 7.5 per cent from 12.5 per cent, and on refined to 15 per cent from 20 per cent to ease inflationary pressure. With the festival season over, import duties may be restored to previous levels.

Depleting stocks, harvest disruptions and higher bio-diesel mandates in the current year will support palm oil prices in the near term. However, expectation of a rise in output in Q4 2016 due to waning effects of El Nino and better harvests in 2017, rising competition from soyabean and relatively lower prices may cause major correction in palm oil prices by year-end.

The writer is Vice-President and Head, Agriculture Food and Retail at Biznomics Consulting

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