Once again, palm oil prices are finding support.
The as of yet unquantified risk of lower soyabean yields has lent some firmness to the soya market which in turn has had a rub-off effect on palm oil. Currently, crude palm oil is trading at around MYR 2,300 a tonne which, without the extant support from soyabean, should have been down 10 per cent from current levels.
Again, palm inventories are high at close to 10 million tonnes (mt) at major producing centres and consuming destinations.
But in the last ten days, there has been another factor engaging market attention. Towards the end of last month, the Indonesian government announced a stimulus package as part of which biodiesel consumption would be increased, even as oil and gas imports would be curtailed, it said.
While the announcement was seen by many as price positive for palm oil, a closer look suggests that the market fundamentals are most unlikely to change anytime soon; and therefore not much should be read into the announcement.
We have seen so many times in the past Malaysian government vociferously talking about boosting biodiesel usage; and such talks often surface when palm oil faces the threat of a price decline.
TALKING MARKET UP
Market participants have by now begun to recognise these announcements as 'talking the market up'. There is nothing to suggest Indonesia will be any different.
To be sure, with about 30 mt annual output, Indonesia is the world's largest producer of palm oil followed by Malaysia at about 20 mt. Currently, the transportation sector in Indonesia has a blending rate of 7.5 per cent biodiesel. It is proposed to raise this to 10 per cent.
Discussion with market participants suggests several issues could come in the way of a rapid expansion of biodiesel consumption in Indonesia.
Two key issues that could stymie blending rate increase are technical and fiscal.
From a technical perspective, whether the automobile sector in Indonesia will be able to accept the B10 blend without compromising on automobile performance and warranties is a serious issue for which short-term or quick-fix solutions may not be possible.
Even Malaysia has not been able to resolve the technical aspect satisfactorily.
From a fiscal perspective, while biodiesel enjoys a higher subsidy over conventional diesel, increase in the rate of biodiesel usage is sure to push up the subsidy burden, something the Indonesian government should be concerned about.
Additionally, geographic dispersal of the country necessitates nationwide transportation of biodiesel from producing to consuming centres.
According to reports, current usage of biodiesel in Indonesia is about 600,000 tonnes (at 7.5 per cent blend). Assuming this is hiked to 10 per cent, the total consumption would rise to about 800-850,000 tonnes. In other words, the incremental use would be marginal in relation to total world production (58 mt) and export trade (42 mt) of palm oil in particular, and world vegetable oils in general. Obviously, the burdensome inventory in Indonesia estimated at 3.5 mt will continue to weigh on market prices.
Palm oil production is at its peak.
With the northern hemisphere ready to harvest sizeable oilseed crops there will be supply pressure over the next several weeks. It is forecast that soyabean planting in Brazil and Argentina will expand rapidly for the 2014 harvest.
So, market fundamentals are not in favour of a palm oil price spike. If anything, downside risks to palm oil prices are higher. Expectation of a rally in the dollar (should QE tapering materialise this month as is widely anticipated) will pressure commodity prices in general.
Role of speculative capital will be limited.