Looking at the supply side, both largest palm oil producing countries (Indonesia and Malaysia) have registered a surprised decline in stocks for last month, which has fuelled the rally in BMD CPO
Intraday on December 3, MCX crude palm oil (CPO) touched a fresh peak of Rs 685 per 10 kg. Being the largest palm oil importing nation, India derives its palm oil price value from its foreign counterpart, Bursa Malaysia Derivative (BMD).
Apart from being consumed as cooking oil, palm oil is also used as a key ingredient in FMCG products like cosmetics, ice cream, chocolate, toothpaste, lipstick etc. Since the second half of October, palm oil futures in Malaysia have surged by more than 20 percent.
Palm oil BMD CPO third month future contract has started its bull run after China and other African countries have shown readiness to ramp up their palm oil purchases from Malaysia, if palm oil prices slide further amid friction between Malaysian and India.
Market players are also optimistic over Indonesia's plans to increase their bio-fuel mandate from B20 to B30 by January 2020. Moreover, the Indonesian Prime Minister has also vowed to increase the mandate by over 50 percent in next one year (as per Financial Times news). Prospects of increased domestic consumption by Malaysia and Indonesia in coming months have primarily resulted in a sharp rally in palm oil in last few weeks.
Looking at the supply side, both largest palm oil producing countries (Indonesia and Malaysia) have registered a surprised decline in stocks for last month, which has added fuel in the rally of BMD CPO. Due to lower production prospects in both countries, adverse climate and ageing trees, palm oil inventories are likely to decline in 2020 season.
In line with Malaysian Palm oil futures, MCX CPO first month futures have also gained over 20 percent since second half of October. Apart from the international factors one major domestic factor which has lifted edible oil prices in domestic market is the drop in soybean production.
Indian soybean production, which crossed 105 lakh tonne last season, is likely to drop below 80 lakh tonne (as per market expectation) following untimely rains and flood like situation in key Soybean producing states like Madhya Pradesh and Maharashtra. As result, edible oil prices (soy oil, CPO, mustard oil), have been swiftly rising in domestic spot markets.
To conclude, although palm oil prices are unlikely to show a sharp reversal in near future on back of strong edible oil prices in international market and prospects of a lower soybean crop in domestic market, a correction in price can’t be ruled out as the prices appear overstretched.
(The author is VP- Head Commodity Research at Kotak Securities)Disclaimer: The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.Are you happy with your current monthly income? Do you know you can double it without working extra hours or asking for a raise? Rahul Shah, one of the India's leading expert on wealth building, has created a strategy which makes it possible... in just a short few years. You can know his secrets in his FREE video series airing between 12th to 17th December. You can reserve your free seat here.