PETALING JAYA: The dramatic narrowing of crude palm oil (CPO) price discount to its competitors – soybean and rapeseed oils – can hamper the steady increase in the price of the local commodity, currently trading above RM2,700 per tonne, from touching the targeted RM3,000 per tonne mark this year.
The traditional CPO price discount to soybean oil has been at about US$150 to US$200 per tonne range, said industry expert MR Chandran.
“On odd occasions in the past 10 years, the discount has reached below US$50 per tonne but it has reduced further to below RM40 per tonne since a year ago. Demand destruction from major importing emerging markets, which accounts for nearly 85% of palm oil consumption, could happen if the palm price discounts to soft oils continues to sustain at US$30 to US$40 per tonne mark for a long time,” explained Chandran.
Hence, the current situation (narrowing of CPO price discount to soybean) is now lending credence to market belief that the anticipated rally in the CPO price may be short-lived, especially with CPO production numbers expected to move up seasonally going into next quarter.
So far, what has made palm oil attractive to price-sensitive countries like India and China is the big price gap to soybean oil. In August 2008, the record (CPO price discount to soybean) stood at US$493.76 per tonne.
Therefore, the deep discount would normally favour palm oil and help to push up demand for the attractively-priced commodity.
At the Friday close, the three-month benchmark CPO futures contract for June settled at RM2,732 per tonne, down RM41 from a day earlier.
Chandran said: “Despite the narrowing of CPO price discount to soybean, the CPO price has been holding firm in the past months which is somewhat a unique phenomenon under current market conditions.
“What we are seeing now is weather and currency premiums, in addition to the flow of funds from developed to developing commodity exchanges, where returns can be good in the short-term.”
The Malaysian Palm Oil Board is also expected to report further lower palm oil inventory in the coming months to about 1.5 million tonnes level.
The lower palm oil stocks scenario could lead to a “psychological” pricing impact triggering the market to translate this situation to supply constraints, especially with the on-going drought conditions.
The price rally for CPO will be eminent if the El Nino weather phenomenon materialises.
In fact, many commodity investors are already on the alert after the recent warnings of El Nino which could affect food and energy prices. “In the short-term, I see CPO prices trading between US$940 and US$1,000 per tonne cif Rotterdam,” added Chandran.
Singapore-based Phillip Futures Pte Ltd investment analyst Chee Tat expected rising external demand for palm oil.
He said in his report that the Malaysian palm oil export tax hike in April might motivate overseas buyers to increase their purchases before the implementation.
Reuters reported that India and Middle East might increase their palm oil imports as they re-stock ahead of the Muslim festival of Eid al-Fitr.
Source: The Star by Hanim Adnan