Crude palm oil prices might have held up well in recent times supported by a host of factors including seasonality and anticipated Indonesian internal demand, but a moderately bearish phase is rapidly emerging.
Several looming bearish factors including strong South American soyabean crop, expected beginning of the palm production up-cycle from April onwards and narrowing spread of palm oil prices with other oils are likely to play out soon.
Expectation of large harvest in South America (Brazil, Argentina) on the back of favourable weather conditions pulled soya futures down 3.5 per cent in December.
Falling soya oil prices have narrowed the differential with CPO prices, making the latter less-attractive. The current price differential of $70 a tonne is less than half of the historical average differential of $150 between soya and palm oils.
The notable point is that the price fall was despite higher usage of oil by the biodiesel industry.
Starting February, Brazil’s large harvest estimated at a record 89 million tonnes (mt) (82 mt) will come into the market and augment supplies. To be sure, Brazil’s crop is nearly equal to the 89.5 mt that US harvested in October last.
Possibly next year, Brazil can relegate the US to the second position in soyabean production.
Argentina is set to produce an estimated 54.5 mt, a 10 per cent rise from lat year.
Palm oil prices are already under pressure after Indonesia forecast higher production. USDA has forecast world palm oil production at 58.4 mt for 2013-14, up from 55.8 mt in the previous year.
In addition, lower crude oil (mineral oil) prices caused by reduced geopolitical tensions can pressure the vegoil complex down.
Importantly, there is perceived risk that soya oil prices may lose support provided by biodiesel industry if tax credit is not extended.
There are other incidental factors such as Malaysian palm oil stocks estimated at very close to the psychological bearish mark of two million tonnes.
Recently, India announced a hike in customs duty on refined oils from 7.5 per cent to 10 per cent ad valorem in order to discourage rising refined oil import.
Higher inventories Additionally, a large rapeseed/mustard crop estimated close to 8 mt in getting ready for harvest. Inventories at the origins and the destinations are also quite high. For instance, India’s port-based and pipeline stocks are estimated at a staggering 1.6 mt.
A higher figure is being talked about for China. Palm oil exports are likely to slow in the coming months as the world vegoil market is well supplied and there will competition to capture market share.
Yet the market may not witness a major sell-off as production in January and February will continue to slow because of seasonal effect. The cash-rich Malaysian industry will manage to defend CPO prices in the MYR 2,400-2,600 a tonne range.