Rupee depreciation is likely to hit imports of crude palm oil by India, the world’s largest market for the commodity, driving down prices in the medium term. Concerns about demand from China, another major market, and a significant harvest in the first half of 2013 are also likely to depress rates for the cooking oil.

Crude palm oil prices have been volatile this year, rising and falling in alternating bouts amid speculation on demand prospects for the year. It has gained 2.4 per cent on the Bursa Malaysia Derivatives Exchange since the start of the year and is currently trading at 2,375 ringgit (approximately Rs 44,650) a tonne .

Rises 21%

But, on India’s MCX exchange, the price of the oil has shot up 21.2 per cent to Rs 50,550 a tonne. This significant differential is on account of the rupee’s 12.4 per cent decline against the dollar during the year. The Government’s decision to slap a 2.5 per cent import duty on the commodity at the start of the year — amid fears that a flood of cheap imports will hurt the domestic oilseed industry — have also pushed up rates at home.

The major reason for palm oil’s popularity in the country has been that it is substantially cheaper than other cooking oils. The country imported 8.5 million tonnes (mt) of palm oil in 2012-13, up 13.7 per cent from 2011-12 levels, according to the US Department of Agriculture.

But imports have been projected to rise at a slower pace of 5.9 per cent in 2013-14 by the US agricultural agency. With depreciation of the rupee to record levels against the dollar, the appetite for crude palm oil might drop. The sizeable differential in the rates at home vis-à-vis overseas markets might also see consumers favouring competing products such as soya oil.

Production outstrips demand

Global crude palm oil production stood at 55.31 mt in 2012-13, according to USDA data, up 6.6 per cent in comparison to the previous year. This resulted in a comfortable 3.2 per cent production surplus vis-à-vis global demand of 53.6 mt during the year. In 2013-14, output is expected to grow by 5 per cent to 58.08 mt, translating into an even larger 3.7 per cent buffer vis-à-vis expected demand of 56 mt.

Production expansion at a faster pace than demand growth will have a bearing on crude palm oil’s fortunes in the near-term. In particular, the peak period for crude palm oil production is the second half of the year, which implies that the impact of higher output will become more evident in the coming months.

Palm oil is the second-most produced oil in the world. Malaysia and Indonesia are the major producers, together accounting for 85 per cent of global output. Around 80 per cent of global crude palm oil production is exported and India, China and the European Union are the major importers. India produces just 0.5 mt of crude palm oil every year.

> arvind.jayaram@thehindu.co.in

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