Despite aggressive forecasts by analysts, the performance of palm oil has been rather muted on the price front since the beginning of this year. There was seldom a case for a bull run in palm oil for various reasons, including market fundamentals, currency factors and flow of speculative capital ( Business Line March 1 and March 9, 2012).
Whatever limited firmness crude palm oil (CPO) exhibited in the last six months was the result of a setback to the South American soyabean crop quickly followed by drought in the US Midwest. Importantly, CPO has been in peak production since April this year and the high season is likely to continue almost till November.
Huge stocks
With export sales of the world’s two largest palm oil producers-exporters slowing, prices have been under pressure in recent months. Worse, fierce competition between Indonesia and Malaysia to maximise market share has ensured lower prices for importers. So, robust production and slowing exports have translated into rising palm oil inventory.
Some trade estimates suggest Malaysia’s palm oil inventory will rise to 3 million tonnes by the end of December, while Indonesia is said to carry probably twice that size. Clearly, despite attempts to scale down the stock data, the volumes are truly burdensome. If anything, stocks are set to expand further in the coming months simply because palm fruits are perishable and have got to be crushed promptly.
On current reckoning, what 2013 holds for the palm oil market is clear. Palm oil will face a bear market reminiscent of 2001-2002. Palm production is cyclical in nature, and 2013 will be a year of biological yield up-cycle. Additionally, it would be important too recall that between 2007 and 2009, Indonesia planted about 2.5 million hectares of oil palm, and the plants are now in full vigour to generate high yields.
Biodiesel demand
CPO production is set to expand by up to 10 per cent to reach 56 million tonnes in 2013 compared with a 5 per cent increase this year. Additionally, fierce competition between Malaysia and Indonesia will turn more intense, especially in a year of higher production. On the other hand, demand for biodiesel, an important market driver, has been decelerating.
Not only are the fundamentals of palm oil likely to turn weak, an anticipated major rebound in global soyabean and other oilseeds production in 2013 will considerably expand the world oil pool. There will inexorably be a supply response to the current high prices of soyabean and other oilseeds (resulting from global production shortfall).
In other words, subject only to the key assumption of normal weather, in 2013, the world will be awash with oilseeds and oils. A large rebound in world oilseeds and oils production will put further pressure on CPO prices. Also, any change – read, worsening – of global macro-conditions can impact prices and increase volatility.
Between now and March (traditionally the lean season for palm oil), CPO prices can be expected trade range-bound between 2,250-2,300 ringgits and 2,550-2,600 ringgits a tonne. Beyond March, CPO prices risk a sharp correction with potential to test 2,000 ringgits a tonne.
In the longer term, there is a strong indication that use of crop-based biofuels will be capped. Palm oil is feedstock for biodiesel. The European Union has taken the lead in the direction. Also, there is a call to end all subsidies for biofuels by 2020. So, further growth potential in the biodiesel segment for CPO is restricted.
(This is an excerpt from the speech delivered by the author at the golden jubilee convention of Central Organisation for Oil industry and Trade, New Delhi.)