Palm Oil Prices to Remain Steady

Crude palm oil (CPO) is in the news as prices have rallied from a seven-year low of 1,800 ringgits/tonne in August 2015 to 2,793 ringgits/tonne in March. This rally was on account of the foreseen El-Nino impact on palm oil production and rise in biodiesel demand in Indonesia.

El-Nino caused a reduction in South-East Asian palm oil yield to 3.26 tonnes/hectare in 2016 compared to 3.62 tonnes/hectare in 2015. As a result, the world’s palm oil output shrank for the first time in two decades. Despite this short-term setback, palm oil remains the world’s top produced vegetable oil. . Indonesia and Malaysia together account for 85 per cent of the global production. Besides its use as edible oil, palm oil is also used by bio-fuel sector for blending. Palm oil prices usually move in tandem with crude oil prices.

This relationship, however, didn’t hold in the September 2015-February 2016 period when Brent crude touched its 12-year low at $26.04/barrel in February 2016. This was due to the drop in supply in this period.

crude palm oil supply

Supply is going to be lower through 2016, according to estimates put out by various organizations. Oil World estimates Malaysian palm oil output to drop to 18.9 million tonnes (MT) in the calendar year 2016 compared to 20 MT in 2015. Indonesian palm oil production is estimated at 32.7 MT compared to 33.4 MT in 2015. Total global production deficit for oil year (November 2015 – October 2016) is expected to be at 1.4 MT compared to a surplus of 2.1 MT for 2014-15.
Bio-diesel mandate

Indonesian biodiesel mandate also supported palm oil market by strengthening its demand. Indonesia’s biodiesel demand for the year 2016 is estimated by Oil World at 2.4 MT, which adds over 1 million tonnes to the bio-diesel demand of 2015 (1.4 MT).

The world’s biodiesel production is estimated to be about 30.75 MT this year compared to 29.76 MT of 2014-15 with higher production from the US, Argentina, Brazil and Indonesia.

What has checked crude palm oil prices, though, from moving higher to about 3,000 ringgits/tonne a couple of factors, including lower palm oil imports by China, falling crude prices and narrowing down of soyaoil premium over palm oil.

Soya Oil premium over CPO narrowed down to $67/tonne by April this year from over $150/tonne in August ’15 due to comparatively faster increase in palm oil prices. The trend of the past three years shows that generally, the spread between soyaoil and CPO prices has remained between $50/tonne and $150/tonne with few exceptions. Whenever this spread starts moving towards the zone of $100-50, soyaoil is preferred more over palm oil and vice-a-versa if the spread is in the zone of $100-$150/tonne.
Indian peculiarities

India’s per capita consumption of edible oils stands at 16.09 kg i.e. 23 MT/per annum for the country as a whole. However, domestic edible oil production has been hovering in the narrow range of 6-9 MT in the last 15 years. As a result, the import of vegetable oil has trebled due to a consistent rise in demand.

Palm oil import accounted for 66 per cent of total edible oil import in 2014-15. This ratio is likely to have fallen in 2015-16 because of higher imports of soyaoil over relatively costlier palm oil.

India is the world’s largest consumer of palm oil with a global share of 20 per cent.

Palm oil demand for 2015-16 oil year is estimated to cross 9 MT, which is three times of the demand in 2005-06. It is preferred more by Indians due to its much cheaper rate and varied use in food industry.

If major currencies remain stable vis-à-vis US dollar and crude oil trades below $50/barrel, palm oil prices are likely to trade steady to higher for the next couple of months supported by Ramadan buying till mid-June, El Nino-led production shortfall and Indonesian biodiesel mandate.

However, things might change in the last quarter of the current oil year with likely positive growth in CPO output. Indonesia is not likely to maintain even 2,00,000 tonnes/month production of bio-diesel. Soyabean crushing in Argentina is expected to run at record levels in May and June as rain-affected beans cannot be stored or exported so will have to be crushed. Supply of soyaoil will be abundant, resulting in demand diversion towards soyaoil. The EU’s reduced consumption of rapeseed oil for biodiesel and China’s domestic reserve sales will further put pressure on palm oil.

Prerna Sharma, The writer is VP and Head, Agriculture, Food, and Retail, at Biznomics Consulting.

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