Palm oil futures tumble 10% on cheaper soya bean oil, but prices to stay elevated

Singapore

CRUDE palm oil (CPO) prices slid as much as 10 per cent on Monday after a sell-off in soya bean oil, a close substitute, over the previous two consecutive days.

The benchmark palm oil contract for August delivery on the Bursa Malaysia Derivatives Exchange fell 5 per cent or RM124 (S$40.03) on Monday morning, before plumbing even lower. By the mid-day break, the contract was quoted at RM3,300, down 9.9 per cent from Friday's close of RM3,663.

The contract recovered some losses over the second half of the trading day and closed at RM3,375, down 7.9 per cent or RM288.

Avtar Sandu, senior commodities manager at Phillip Futures, in a research note on June 14, attributed the recent weakness in soya bean oil futures to concerns that biofuel blending requirements in the United States would be cut by the Environmental Protection Agency, as well as rains across the American Midwest that could drive up supply.

Dorab Mistry, an edible oils analyst and director at Godrej International, told The Business Times that vegetable oil prices have been "hanging by a single slender thread" of a bullish soya oil outlook due to local biodiesel and renewable diesel demand from the US.

"The possibility of some relief being granted to US fossil fuel refiners by the Biden administration has hit that single slender thread," he said. "This correction was inevitable. We now have to watch US developments and these will be a factor in price-making, in addition to weather and fundamentals."

Some market watchers also pointed out that Covid-19 situation in India could be dampening demand. India is a major importer of CPO, and had a big influence on its market price. Anu Das, an editor at S&P Global Platts, who is not optimistic about demand from India, also points out that supply from Malaysia could soon increase.

"Many are expecting that palm oil output in Malaysia could exceed expectations as Covid-19 restrictions may lift and labourers return to plantations, which is likely to be beneficial for output," she said.

Yet, most market watchers do not see CPO prices retracing too far.

Aurelia Britsch, head of commodities at Fitch Solutions, figures CPO prices will average RM3,400 per tonne this year, the highest level recorded since at least 2000.

"Palm oil supply has been coming in below expectations in Malaysia since 2020, due to labour shortages aggravated by Covid-19, which is keeping stocks at multi-year lows," she said. "Meanwhile, palm oil import demand is recovering in many different markets as economies reopen."

DBS analyst William Simadiputra is expecting CPO prices to stabilise at the current levels unless the soya bean oil correction continues. In his view, the current tight supply conditions means the downside risk for CPO is "minimal".

Indonesia's biodiesel programme, which aims to maximise domestic use of palm oil and cut imports of oil, will also help boost prices, he added.

Fitch's Ms Britsch is more circumspect. "We see soya bean prices easing into 2022 as supply recovers strongly, which will also push palm oil prices lower in the coming quarters," she said.

Even so, she sees CPO prices averaging RM2,900 per tonne in 2022. While this is lower than the levels at which CPO is currently trading, it would still be among the "highest-ever prices recorded in the past", she said.

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