Ravindra V Rao
A victim of the supply glut and one of the major losers of 2018, palm oil showed signs of gains in early 2019. The rise in prices, however, was short-lived, given the oil's high inventories in Malaysia.
Benchmark Malaysian palm-oil futures have declined almost 11 percent from the January high. India being the largest importer of palm oil from Malaysia, domestic crude-palm-oil (CPO) prices are mainly driven by Malaysian palm-oil futures. Accordingly, domestic crude-palm-oil prices also declined, by around 8 percent.
The January price gains were on expectations that palm-oil output in Malaysia would shrink due to seasonally lower yields and thus stockpiles might be reduced to some extent. Moreover, the export picture was optimistic, given the attractive quotes. Exports, however, declined 21.4 percent in February while output contracted just 11.1 percent. Thus, inventories continue above the three-million-tonne mark.
In the home market, year 2017-18 (oil year i.e. Nov-Oct), India imported around 14.51 million tonnes of edible oil, which comprised 60 percent palm oil variants. In the first three months of oil year 2018-19, edible oil imports were around 34.29 lakh tonnes, constituting 68 percent of palm-oil variants.
On the recent modification in the duty structure, the difference between CPO and RBD palm olein duties has shrunk to just 5 percent, against 10 percent previously. This resulted in a sharp increase in imports of RBD palm olein, to 1.67 lakh tonnes in January 2019, from 1.3 lakh tonnes in December 2018, up 28 percent. This is likely to increase in coming months considering shipments of RBD palm olein to India lined up from Malaysia. Moreover, the currency factor affects the quantum of imports and thereby prices of CPO in the home market.
Back to global palm oil giants. Palm-oil output in Malaysia is expected to decline further in March before rising in April and May. The weather will continue to play a major role in determining the output. Malaysia's palm production is now estimated to rise 3.5 percent from a year earlier to a record 20.2 million tonnes in 2019.
Indonesia's output is seen increasing 7 percent to 42.4 million tonnes. Global output is likely to rise 5.6 percent to 73.4 million tonnes this year, the slowest growth in three years and a return to a normal pace after bumper-production years (Source: Bloomberg).
Supply-side fundamentals may continue to exert pressure on Malaysian palm-oil futures. For benchmark prices to rise once again, palm inventories need to fall substantially, from 3.05 million tonnes at present. The bullish factor that would drive prices higher is demand-side fundamentals, including bio-diesel consumption and demand from key importers such as India and China.
The author is Head - Commodity Research & Advisory at Anand Rathi Shares and Stock Brokers.Disclaimer
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