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Palm Oil Trades with Weak Undertone – Downside However Seems Limited near Term

Abhijeet Banerjee
Abhijeet Banerjee

As per official sources India has suspended 39 licenses to import refined palm oil after a jump in duty-free imports from Nepal and Bangladesh.  As per sources, these 39 licenses for import of refined palm oil will be immediately put under suspension. Nepal and Bangladesh are regular exporter of palm oil to India.

The Indian Government has put refined palm oil and palmolein on a list of restricted items on Jan. 8, although New Delhi later issued licenses to import more than 1.1 million tonnes of refined palmolein. India is the world’s biggest importer of edible oil. Domestic palm oil markets are currently weak as this news puts some pressure on Indian trade scenario. Malaysian palm oil futures also trading with weak undertone amid India’s import restrictions on the refined product.

The benchmark palm oil contract for July delivery on the Bursa Malaysia Derivatives Exchange as on 10.30 Hrs IST was trading near 2010 ringgit per tonne, down 5 ringgits over previous close. Malaysian palm oil futures had jumped yesterday on optimistic views regarding demand to revive as countries begin to ease coronavirus-led restrictions put in place to curb the spread of the virus.

Later in the day the Malaysian Palm Oil Board will be releasing its April supply and demand data hence most fund houses are maintaining cautious stance.  According to cargo surveyors, Malaysia palm oil exports in May 1-10 had posted a growth between 7.8% and 11.9% from the previous month.  Reports say that Indonesia, another leading palm oil producer, plans to delay the hike in bio-content in palm oil-based biodiesel to 40%, Instead it still intends to continue with 30% content. There are speculations that the Indonesian government may again consider revision in the bio-content percentage owing to lower crude oil prices.

Meanwhile an official EU data showed yesterday that palm oil imports by the European Union palm oil imports in the 2019/20 season(which commenced from July 2019), stood at 4.78 million tonnes by May 10, has fallen by nearly 15% from a year-ago period.

The USDA in its April Demand and Supply report has forecasted Malaysian crude palm oil (CPO) production in marketing year (MY) 2019/20 at 19.7 million metric tons (MT), lower by 1.15 million MT compared to the previous year’s estimate. The fall in production estimate is because of following factors:

Analysts had reported abnormally dry weather in Peninsular Malaysia and Borneo in mid-2019, resulting in diminished palm oil fruit yields. Besides, Industry reports have stated that production among smallholder producers has been adversely affected due to lower usae of following a fertilizer use.

MY 2020/21 CPO production is forecast at 20.7 million MT. This robust increase is based on an assumption of more regular weather patterns, a cyclical rebound after plantations recover from drought-induced tree stress, and a downward trend in fertilizer costs so far this year. On the other hand the USDA had estimated 2019/20 CPO domestic consumption at 3.85 million MT, up roughly 240,000 MT compared to previous year estimate of slightly over 3.6 million MT. The expected increase in consumption is based on the Government of Malaysia’s intentions to move from a B10 mandate towards a B20 mandate. Malaysian palm oil consumption for MY 2020/21 is estimated at 4 million MT, increase of 150,000 MT versus last year. This expected increase for the year is based on the assumption of continued progress by the GOM towards a B20 mandate.

Prices of edible oils are already running lower while foreign edible oil markets are often getting influenced from recovering crude oil prices. Currently analysts are optimistic of moderate strength in crude oil from near term perspective. At the same time imported arrivals are not expected this month while most mandis are closed due to the lockdown. Therefore supplies constraints shall persist while locals shall be consuming the oils on daily basis. Therefore traders and industry persons do not expect much fall in prices from current levels and in fact expect moderate upside movement in prices, ahead of the Ramazan season which shall be supportive for the consumption of this oil. With CPO i.e. crude palm oil turning significantly cheaper than soya oil, chances of increase in demand remains high as such.

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