By The Smart Cube
Palm oil, the most popular vegetable oil globally, is used in a wide range of food (such as margarine and ice cream), non-food products (such as shampoos, soaps, and cosmetics), and biofuel production.
In late 2012, palm oil prices slumped following a bumper crop in major producing regions—Malaysia and Indonesia. However, prices revived at the beginning of Q2 2013 as production in Indonesia and Malaysia entered a low output cycle.
In April 2013, palm oil prices increased to $750–770 per MT in these regions, reviving from its biggest slump of about $670–680 per MT in November 2012. Prices are likely to remain high at $755–820 per MT until April end; however, elections in Malaysia and increase in soybean export from South America are anticipated to reduce prices to $720 per MT after April. Prices are expected to further decline after August and futures are likely to drop below $656 per MT once the low output cycle is over.
Production is, however, likely to remain strong between 2013 and 2015 with output expected to reach 18.9 million MT and 30 million MT in Malaysia and Indonesia, respectively, in 2013. As of Q2 2013, production is slightly outpacing demand by 1–2%, and, therefore, stock inventory is expected to remain high at about 2 million MT in 2013, impacting prices negatively. CPO production is set to register a strong growth of 8–10% in 2013, taking the world output to 57–58 million MT with Indonesia (30 million MT) and Malaysia (18.9 million MT) accounting for about 85% of the total production in 2013.
As a result, five underlying factors that are likely to impact palm oil prices in 2013 have been assessed below:
1.) Elections in Malaysia: Palm oil prices are expected to be volatile during the upcoming elections in Malaysia. In April 2013, palm oil stocks in Malaysia dropped the lowest over eight weeks and Malaysian Ringgit began to slide after Prime Minister Najib Razak dissolved the parliament. With elections in June 2013 and speculation over the ruling coalition losing support and derailing reforms, contract prices for June have already dropped to about $761 per MT.
“With the elections approaching, investors may avoid holding Ringgit-denominated assets on fear of political risks. Production is picking up in Malaysia but gaining exports may cushion prices.” – Chung Yang Ker, Analyst, Phillip Futures Pte. (April 2013)
2.) Bumper harvest of soybean in South America: Prices of soybean oil, an alternative to palm oil, are expected to decline as bumper harvests are expected in South American countries—Brazil, and Argentina. According to the USDA, a record 83.5 million MT and 53 million MT of soybean crops are likely to be harvested in Brazil and Argentina, respectively, in 2013. This is expected to put further pressure on the already dwindling palm oil prices.
“Bumper soybean crop from South America is expected to pressure soybean oil prices and indirectly, CPO prices as well. In addition, the high palm oil inventory globally should cap CPO prices on the upside to below $920 per MT in the near term.” – Lim Cheong Sun, Analyst, Kenanga Research (March 2013)
3.) European debt crisis: According to the median of analysts’ forecast compiled by Bloomberg, the economy of Europe, the third-largest buyer of palm oil after India and China, is expected to contract for a second consecutive year in 2013 owing to the debt crisis. According to the Societe Generale de Surveillance, shipments to EU countries by Malaysia dipped 18% M-o-M in March to 155,870 MT, while the total exports fell 7% to 1.1 million MT. Declining demand from Europe is likely to inhibit the rise in palm oil prices in the near future.
4.) China’s slowing economy: In 2012, China’s largest cities, including Beijing and Shanghai, tightened rules on home purchases after the center asked local governments to pacify the property market. Restrictions on property and investments in China are expected to slow the economy and decrease the demand for palm oil. Inventories in China, which were at a record level at the beginning of March, fell 60,000 MT to 1.19 million MT toward the end of the month due to a decline in imports.
“European debt crisis and China’s economy will remain the key to palm oil price outlook. There are concerns that property and investment curbs in China might slow the economy more than necessary and dampen the demand outlook for palm oil.” – A report by Phillip Futures Pte (April 2013)
5.) Decline in global biodiesel demand: The demand for palm oil in the biodiesel sector is experiencing a structural slowdown driven by the lack of new mandates and increased constraints of substitution with CPO. Experts state that CPO is nearing demand saturation in the biodiesel sector. The global biodiesel demand is projected to rise by a mere 1 million MT during 2012–2013, down from 2–4 MT in recent years. License and quotas as well as threat of anti-dumping duties are also likely to impede growth in 2013. Further, at least 1 million MT of used cooking oil is reused as a raw material for biodiesel, which reduces the demand for palm oil.
“The booming United States mineral oil production will have a direct impact on the palm-based biodiesel initiatives led by the respective governments. Last year alone, the world demand for biodiesel had shrunk by 2 million MT. At the same time, many Western countries are starting to cut back on their biofuel subsidies and targets. Some European nations are already backtracking on their biodiesel mandates, while in the US there is an issue over the withdrawal of the Blenders Credit at $1 per gallon.” – Dorab Mistry, Director of Godrej International Ltd (March 2013)
The palm oil industry is going through a period of transition. Palm oil prices are expected to be volatile in H2 2013 and this entails an interesting period for buyers to observe the probable changes in the market.
About The Smart Cube
The Smart Cube is a global professional services firm that specializes in delivering custom research and analytics services to corporations, financial services and management consulting firms globally. The firm helps organizations make critical decisions across four key business areas: Procurement and Supply Chain; Strategy and Marketing; Financial Services; and Analytics. Founded in 2003, The Smart Cube has conducted more than 17,000 studies through its global network of analysts. The firm is headquartered in London and has professionals throughout Asia Pacific, the United States, Europe, and Latin America. Follow The Smart Cube on LinkedIn at http://www.linkedin.com/company/the-smart-cube. For more information, please visit thesmartcube.com
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