Palm oil has seen better days. Crude palm oil prices are at their lowest in five years.

This versatile vegetable oil is used as inputs for everything — from cosmetics to confectionery, foods, soaps, detergents and biodiesel.

Malaysia and Indonesia account for almost the entire world’s palm oil production. An excellent harvest in Malaysia, an expected bountiful production of the other widely-consumed soyabean oil, and a drop in imports have resulted in palm oil prices taking a beating.

Slipping prices From mid-2010 to early 2011, crude palm oil (CPO) prices shot higher by about 55 per cent. Strong demand from countries such as China, India, Turkey and South Africa aided the price rise. The stronger demand, combined with tight global supplies of soyabean oil and palm oil, supported prices through 2011.

Indonesian crude palm oil production closed 2010 with a production rise of just 1 per cent at 14 million tonnes, going by data from Statistics Indonesia.

Similarly, Malaysian Palm Oil Council’s (MPOC) production data showed a drop of 3 per cent in 2010 over the previous year. The 2011 average export price recorded by Malaysian producers was the highest ever at 3,219 Malaysian ringitt (RM) a tonne, according to the MPOC.

From 2012 onwards, prices took a turn downwards. A build-up in the stockpile as stocks were carried over from the previous year and a drop in demand from countries such as Egypt, Pakistan and the Philippines sent prices sliding. China, among the largest importers of palm oil, increased imports of soyabean oil instead. The UN FAO oil price index is also at its lowest since 2010.

Beginning April 2012, CPO spot prices started sliding, losing 43 per cent through the year.

Prices moved between 2,100 Malaysian ringitt and 2,600 Malaysian ringitt for most of 2013 as well. While some recovery in prices did come about in early 2014 on lower stocks, it eventually gave way.

From June this year, CPO prices crashed 18 per cent. In September, spot CPO prices reached a five-year low at 1,942 Malaysian ringitt a tonne.

However, open derivative positions on palm oil recently surged as prices hit a low.

This can be partly attributable to buyers stepping up as the Malaysian Government scrapped export duty on palm oil for September and October to clear stockpiles.

The Indonesian Government may react to this duty cut too, which can affect prices in the near future. Both countries set monthly export duties.

Going ahead Even so, palm oil prices may remain muted for some more time yet. For one, a record production of soyabean, which is a substitute for palm oil, is expected in the key producing US market.

This is pulling down soyabean oil prices. As a result, the price advantage palm oil has over soyabean oil is already narrowing. From a 30-40 per cent discount to soyabean oil in 2013, CPO prices are now just 10-15 per cent below soyabean oil.

If the CPO prices rise further, it will simply narrow this discount; a shift to soyabean oil may consequently take place.

This can, therefore, cap palm oil demand and push prices back down. In a nutshell, the extent to which CPO prices can rise may be limited. Reports also suggest that Chinese demand, which accounts for the majority of global imports, is also unlikely to move much higher.

Two, the El Nino effect squeezing production hasn’t panned out as expected. Malaysian production is up 7 per cent so far this year, and reports suggest that the Malaysian August stockpile is surging even higher.

What can help support palm oil prices and prevent steeper declines is the demand for palm oil from the energy sector. Indonesia and Malaysia use the oil to meet their own biodiesel mandate; this use could step up, given the current attractive prices.

Malaysian exports to the EU, which uses it for bio-diesel, have risen 11 per cent so far this year, on the back of a 5 and 11 per cent rise in the preceding two years.

The temporary export duty cut could also make prices more competitive vis-à-vis other vegetable oils and therefore boost demand.

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