Is global crude palm oil price rally losing steam?

Global crude palm oil prices are at record highs, and are widely perceived to rise further on high demand and continuing tight supplies.

However, a section of the industry is wary of the rally and feels a correction is on the cards sooner than expected, with high rates making palm oil prices uneconomical for its diversion to make bio-diesel, a prime culprit for the price spurt.

The benchmark May crude palm oil contract on Bursa Malaysia Derivatives quoted 4,146 ringgits (Rs 51,825) a tonne, up 141 ringgits from Friday on rising crude and soyoil prices.

Crude palm oil prices have risen by over 30 per cent since January on increasing edible oil demand from India and China, and higher diversion of palm as well as soyoil for making bio-fuel.

India, one of the largest importers of edible oils in the world, buys nearly 5 million tonnes of palm and soy oils annually to meet nearly half of its domestic demand which has been rising due to limited domestic supplies and increasing population.

Demand from China has also risen sharply in the past few months as the country has stepped up imports to cool inflation from its 11-year high levels.

It also plans to stock enough cooking oils ahead of the Beijing Olympics in August.

Dorab Mistry, a London-based oil industry expert, said higher demand is likely to keep prices bullish.

In the event of a weather scare, global palm oil prices can even see a sharp spike to 4,500 ringitts a tonne during September-February, Mistry told an international oil meet in Kuala Lumpur last week.

Agreeing with Mistry's views, Davish Jain, chairman of the Central Organisation of Oil Industry and Trade, and a leading soymeal and oil trader, said supply-demand fundamentals remain tight and lower availability of US soybean could push global prices further.

Rising prices of soyoil, a direct competitor of palm oil, have also forced India and China to prefer palm oil to soyoil.

Soyoil prices have risen substantially as the crop output is 20 per cent down year-on-year in the US "" the largest producer of soybean""with farmers switching to corn.

More than 20 per cent of the shrunk crop has also been diverted for bio-fuel manufacture, leaving lesser quantities for use as cooking oil.

The US government is providing subsidies to promote higher use of bio-fuel ""made largely from corn and soybean "" to offset the rising crude oil prices. "We are currently importing palm oil at about $1,500 a tonne levels, which can easily go up to $1,700 if the current fundamentals prevail," Davish Jain said.

Jain said demand from China is likely to remain strong in the coming months as the country is planning to stock about 400,000-500,000 tonnes of edible oil ahead of the Beijing Olympics that start in August.

He said high Chinese demand, tight US bean supplies and the possibility of higher imports from India, due to a projected fall in local mustard oil, would continue to provide support to the palm oil price rally.

Contrary view
But some traders differed and said a price correction was due. Rajendra Mansinghka, an official of the Indian Bio-Diesel Association, said the rally in edible oil prices so far was largely due to diversion of large quantities for bio-fuel manufacture.

"Edible oil prices have now risen so much that it has become uneconomical to use them as an alternate to petroleum crude," he said.

Mansinghka said at $100 a barrel, the cost of crude worked out to about $600 a tonne. Palm oil prices were over $1,300 a tonne and soyoil at about $1,600 a tonne.

"Palm oil is double the value of petroleum crude and soyoil is 2.5 times that of crude...It is simply not viable to use raw materials that cost much more than the finished products," Mansinghka said.

He said palm oil prices were already in the over bought range and should start easing.

President of Rajdhani Oil Mills Traders Association, Sat Narain Agrawal, echoed similar views and said palm oil prices should stabilize now, as demand would start getting eroded if prices rise further.

"Consumption of edible oil, particularly in price conscious countries such as India, will start falling if prices rise further. That will act as a natural cap on prices," he said.

Expectations of higher kharif oilseed sowing in India this year will also act as a deterrent to a further rally in palm oil prices, NR Vishwaradhya, head of Karnataka-based Ennar Refineried, said.

He said higher realization from oilseeds this year will be an incentive for farmers to grow more oilseeds.

"If India's edible oil import needs come down, prices will automatically come off the highs," Vishwaradhya said.

A correction in palm oil prices is perhaps inevitable, but when and why is the million dollar question.