POINTERS: Changes in Supply-Demand Balance of China Oils & Fats Market under the Structural Reform of Supply Condition

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Questions & Answers (3) :

Ahmad Redhuan

7 years ago

Mr Cai, thank you for your presentation. What is the status of the shadow banking facility offered by China banks for palm oil purchase? Is it completely dismantled? Do you have comments on China\' s importers that using Renminbi as a currency of settlement for palm oil import from Malaysia? Is it gaining popularity?

Cai Neng Bin:
As a result of the adjustment of China economic structure, the drop in ROE, the control of credit risk by government, this has led to huge bank debt among the credit financing players and most of them basically have withdrawn from the market, even if there is would be some small players but are under supervision by the banks. The withdrawal of credit financing players has led to strengthening of spot basis of physical price and further discourages the import behaviours based on margin against futures. With the devaluation of the RMB against the U.S. dollar and the control the outflow of funds in China, cost of locking on long-term foreign exchange become heftier, and this increases the difficulty to lock in the import cost. Long period of discount also significantly reduced the import among the big traders. Currently, Chinese importers generally adopt the model of imports based on margin against futures, but the fluctuation of RMB exchange rate increases the uncertainty to trade under this strategy. Chinese importers definitely welcome the adoption of using RMB for quotation and trade, so that can lock in spread against futures more accurately, as well as able to effectively lock in the import profit. This is something that most importers are happy to see!
7 years ago

Anna

7 years ago

TQ. Your answer earlier suggest uncertain price outlook in China’s oils and fats market. Amidst this price uncertainty, how does the oils and fats companies in China organised their oils and fats purchase? Is their feedstock purchase strategy in times when market is certain and uncertain similar?

Cai Neng Bin:
Thanks for your question. Chinese oils & fats importers are currently importing based on import margin available against futures market. In order to maintain their market share and also the operation rate, processing plants in China (mainly refinery and fractionation) will normally trade through spot basis price to lock in profit. Hence, when the margin is good, it will led to large amount of import and later these palm oils will be disposed through futures contract (this explained why futures contract of P1505 (May 2015), P1509 (Sep 2015) and P1601 (Jan 2016) in DCE saw huge delivery). Then when the import margin is not attractive for P1605 and P1609 contract, the import of PL dropped significantly (same to P1701 contract). This led to the increase of spot basis price of PL and narrowed the discount of PL against SBO, which subsequently restrain demand for PL. As the spot basis of forward months closely related to the sales and stock level, coupled with the diminishing trade financing activities, poor import margin against futures deter the traders and importers from bringing in palm oil. In anticipation of recovery of CPO production and increase in stock in producing countries, most Chinese traders expect that the CPO price will not increase further but as price for nearby months contract remain high, it is difficult for China to purchase PO even during active importing months. Nevertheless based on the series of development, most traders currently hope and waiting for the positive import margin to appear when futures price in DCE continue to increase (due to low stock in China) and price quoted by exporters drops (due to the rising stock in producing countries as a result of recovery in output). It is anticipated that the low stock level will remain unchanged until end of the year and the strengthening of spot basis made the recovery of import margin became tougher as the premium of futures against physical price in China slowly narrowed.
7 years ago

LIM TECK CHAII

7 years ago

TQ. China’s palm oil import has drop in the first half of 2016. As mentioned in your presentation, palm oil imports is strongly affected by rapeseed oil destocking by the government of China. For the second half of 2016, is sentiment among buyers and traders in China now more positive on palm oil price?

Cai Neng Bin:
Dear Mr Lim, thanks for your question. The release of state reserve rapeseed oil in the first half of 2016 which led to the increase of rapeseed oil supply had definitely suppressed the upward of vegetable oil prices. And these rapeseed oils which were auctioned at the very low base price have also taken some market out from low melting point palm olein. During the same period (1H2016), CPO production dropped and raised the import cost against the local market price, coupled with the demand of palm oil which retuned back to basic demand from industry (less speculation and hence lower demand) has made import margin against the futures not attractive for importation. But this situation has later supported the spot basis price of PL in local market. Soybean crushing in China also increased in 1H2016 and coupled with the release of state reserve rapeseed oil has caused the building up of stock in the market. This led to some crushers have to dispose their soybean oil through DCE futures market instead of physical market, and left minimal room for upward price movement of vegetable oils. On the other hand, low stock level in producing countries supported the export price and with strong demand from India, which left limited volume available for Chinese to purchase. From the import situation, China has earlier on locked in the PO cargoes for August and September and this may stop the stock to go down further from August onwards. Furthermore, half of the regular demand of palm oil for 4Q2016 has also been ordered but the remainder would need to wait until the discount of market price against landed to narrow to around RMB100 to be attractive to import. Current discount of RMB200/MT saw most traders and importers waiting at the sideline, and hoping that the building of stock in producing countries would lower the export price.
7 years ago