Palm Oil Supply Squeeze May Trigger Rush to Buy

Analysts say any further rise in palm oil prices may see soya oil take more market share from palm oil in the future

STUNG by the twin woes of erratic weather and aggressive replanting, palm oil traders are bracing for a supply squeeze in the months ahead, spurring importers to stock up ahead of an anticipated rise in demand.

This is already reflected in Malaysian prices – palm is one of the biggest gainers this year, soaring 42 per cent – and analysts say any further rise may force Indian and Chinese buyers to shift to soya oil, which has risen at a much lower rate.

Analysts said top producers Indonesia and Malaysia could see palm output fall in April-June, rather than a gradual increase as usually expected, driving total stocks down by more than half to below 2.5 million tonnes by the end of the period, from a record 5 million tonnes in November.

“We need to cover quickly especially if this supply tightness comes into play,” said Sandeep Bajoria, an Indian vegetable oils trader. “If things get too bad, I won’t be surprised if soya oil takes more market share from palm oil in the future.”

While palm has gained 20 per cent just this month on heavy buying from India, China and Europe, soya oil has struggled to keep up, rising only 10 per cent in 2009. Also, India recenty removed its duty on soya oil imports, bringing it on par with crude palm oil and making it an attractive option.

In addition, palm oil stocks in Malaysia hit a 20-month low by the end of March.

“Chinese traders may also shift to much cheaper soya oil if palm oil supplies dry up. So hopefully there might be a breather for stocks and prices,” said a trader.

Analysts said India, the world’s second-largest consumer of vegetable oils after China, has only covered 20 per cent of its crude palm oil requirements for May, which is generally 100,000 to 200,000 tonnes monthly, sparking some panic.

In addition, India will start buying aggressively to meet a surge in demand, which normally happens during the Hindu festival months from September to November.

“We could see prices go up to RM2,600-RM2,700 in the near term due to bad production,” said S. Paramalingam, executive director of Pelindung Bestari. “The markets have tested the 2,550 level this week, so technicals are gearing for another rally.”

Traders said even if some importers switched to buy a few cargoes from Indonesia to cover immediate needs because of high Malaysian prices that will not do much to ease Malaysian prices.

“Our port infrastructure is not ready to handle too many vessels,” said Derom Bangun, vice-chairman of the Indonesian Palm Oil Board. “If suddenly five vessels are diverted from Malaysia to Indonesia, we are not ready to accept them.”

Malaysia has approved the replanting of 110,000 hectares covered with oil palms above 25 years old, accounting for about half of the industry-wide scheme started in October that aimed to remove 700,000 tonnes of palm oil, while stocks swelled.

“The job of making production weaker is under way,” said M.R Chandran, an independent industry analyst and former head of the Malaysian Palm Oil Council.

“Now there is a proposal from the industry to replant oil palms between 20 and 25 years old as these account for a larger chunk of total hectarage.”

Traders said if the government decides to support this new scheme and implements it when production peaks towards the end of the year, at least 2 million tonnes could be taken off the market. – Reuters

Source : Business Times

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