POINTERS: Palm Oil Price Trends in Time of Low Energy Prices

By: Mr. Nagaraj Meda

Managing Director, TransGraph Consulting Pvt. Ltd, India Current Role: Mr. Nagaraj Meda is the Founder, Chairman and Managing Director of TransGraph Consulting, which renders knowledge, based consulting services in the areas of price forecasting, trading, sourcing and risk management to leading manufacturing, commodity trading, FMCG and metal companies of the world. Education: Mr. Nagaraj Meda is a Post –graduate in economics with specialization in International trade/finance from University of Hyderabad (Central University) and has additional qualifications in the fields of technical analysis and portfolio management.

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Volatility in veg oil markets continue to be driven by not just supply-demand dynamics but also interrelated with the currency and energy markets given their dominance in deciding the export-import competitiveness and Veg oil offtake in alternate fuels like biodiesel. at this juncture, looking at the veg oil markets, supply is growing Y-o-Y basis with good oilseed crops across the globe whereas efforts are directed towards sucking out the surplus oil by promoting usage of biodiesel made out of Veg oils viz. palm, Soy, rape & others.

Going in to the details, On the soy front, Currency devaluation in Brazil & Argentina against the strengthening dollar has improved the export competitiveness of commodities and the share of US soybean exports in the global market is seen dwindling due to major importers shifting to South America, thus resulting in stock build up at US as we move forward in to 2016. With china already shifting their preference to South America in the OND’15 quarter, jan’16 ending stocks in US have remained higher by about 8.5 million ton vis-à-vis corresponding period of the previous year. While the market grapple with higher stocks at US & South America as on today, soy markets are heading in to another harvest in South America from Mar-April’16 and the same could bring additional pressure on to soy complex in the coming 1-2 months.

On the biodiesel front, weakness in crude oil prices due to prevailing supply glut from major producers has affected the blending economics (a negative margin of $ 400 per ton in soy & palm) which could potentially keep biodiesel production in Indonesia, EU & US on a subdued note, thus resulting in higher stocks at major palm & soy regions Y-o-Y basis

While Chinese economy continue to show weakness and consistent devaluation of Yuan hinting at slowing demand, macro-economic concerns continue to rule markets in the medium term. However, US Fed unlikely to go for another interest rate hike in March might lead to appreciation in emerging market currencies as we move in to next 2-3 months

On the palm front, palm prices rallied in the last few months driven by dryness in the first half of 2015 and also on the optimism over biodiesel blending in Indonesia aided by the Indonesian crop estate fund to subsidize the biodiesel industry. On the other hand, Supply squeeze during the period of Nov-Mar has helped to keep the momentum intact. However, with the recent rise in palm prices, spreads with the rival oils like soy oil have been coming down with forward FOB spread (Argentina Soy-Malaysian CPO) already trading at around $ 30 per ton, any further price rise in palm could potentially result in further narrowing of the spread which could push destinations like India to shift to Soy. With palm production likely to revive from May-June ’16 months, stock build up is also likely to push the palm prices down in the coming 1-2 months.