NEW DELHI ( Commoditiescontrol)- Malaysian palm oil prices have started showing signs of bottoming out after losing more than 20 percent of its value this year 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, Indonesia and Malaysia.
Further, the EU’s decision to phase out palm oil from its use as transport fuel by 2030 has dampened the sentiment. On November 27, the palm oil futures on the Bursa Malaysia Derivatives Exchange (BMD) hit 1,940 Ringgits a tonne, the lowest since August 2015.
The general decline in CPO prices was due to high inventory levels in Malaysia and Indonesia, coupled with low demand.
However, despite over-supply and timid demand, any further sharp correction in palm oil prices is unlikely ahead due to a likely pick-up in demand from the price-sensitive Indian and Chinese buyers waiting to enter the market after a dip in the price level. Instead, 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).
Expectations of tapering off stock levels from January onwards are also buzzing in the market.
IOI Corp CEO Lee Yeow Chor has said that that palm oil prices will likely pick up from February onwards as stockpiles begin easing from Jan. Stockpiles in Malaysia can rise from current levels to peak at 2.9 million tonnes by December, before dropping from January onwards due to the lower seasonal period, he said.
In both India and China, stocks levels have declined and restocking in both the countries may start from this month onwards.
Also, the rumours of India reducing the import duty by 4 percent 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.
Palm oil prices are also influenced by movements in crude oil, as the edible oil is used as feedstock to make biodiesel. If OPEC decides to cut production in its coming meeting then crude will start to roar again, resulting in support to the palm oil prices.
The Organization of Petroleum Exporting Countries (OPEC) and non-OPEC members will meet in Vienna, Austria on Dec. 6 to discuss a new round of production cuts of 1 million to 1.4 million barrels per day (bpd) and possibly more.
Crude’s drop since October is on a par with the 2008 price crash and steeper than that of 2014-2015, both of which prompted the Organisation of the Petroleum Exporting Countries to agree output curbs to support the market.
The two benchmarks, North Sea Brent LCOc1 and US crude CLc1, have had their weakest month in more than 10 years in November, losing more than 20 percent as global supply has outstripped demand.
Additionally, 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.
Industry analyst Dorab Mistry is also expecting a rebound next year after an extended slide through 2018 if an El Nino weather pattern predicted by experts reduces production.
Japan's national weather bureau said last month the El Nino weather pattern appears to have formed and that there was a 70 percent chance it would continue into the Northern Hemisphere spring.
"If it (El Nino) is of moderate intensity, it will affect palm production from July 2019," said Mistry, speaking at an industry event in Guangzhou last month. "That period will coincide with the biological low cycle and the resting period for most palm trees," said the analyst, also a director of Indian consumer goods company Godrej International.
Increasing global use of vegetable oil in making renewable fuels was supporting prices, Mistry said.
"Vegoils are now a hostage to biodiesel," he said. "Biodiesel demand is now the most important price making factor for 2019." He said the use of vegetable oils in making biodiesel is expected to exceed 40 million tonnes in 2019.
"World demand for vegoils for energy use in 2018 grew at a very good pace, by over 3 million tonnes due to higher usage in Brazil and Indonesia," the analyst said.
"In 2019, the Indonesian (government) mandate of 20 percent palm (content in) biodiesel will be fully implemented. Brazil will also expand usage," Mistry predicted, "so energy demand can expand by 3-4 million tonnes."
(By Commoditiescontrol Bureau)
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