Challenging environment ahead for world edible oils market

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KUCHING: Challenging times are coming for the world’s edible oils market, says MIDF Amanah Investment Bank Bhd (MIDF Research), as the anticipated bumper soybean harvests in South America has exerted downward pressure on edible oil prices in general – particularly on palm oil.

The firm observed as of last Friday, the discount of palm oil to soy oil was only at around US$66.70 per metric tonne which is 61 per cent lower than the 3-year average discount of US$173.30.

“The narrowing price gap between soy oil and palm oil has consequently affected the demand for palm oil as some consumers shifted their preferences from palm oil to soy oil due to the latter’s relatively competitive price,” MIDF Research opined in its note to investors yesterday.

“Apart from stiff competition in the edible oils market, palm oil prices are also influenced by the fmovement of crude oil prices. In the environment of low crude oil prices, the prices for palm oil and other palm products were similarly affected.”

Malaysia would likely see a deterioration in demand for palm oil further exacerbated by the economic uncertainty in China, the biggest consumer of Malaysian palm oil.

In February 2015, palm oil purchases from China dropped by 75 per cent year on year (y-o-y) to only 64,765 metric tonnes. This was the weakest figure since January 2008, MIDF Research said.

This was on the back of Malaysia recording its lowest monthly exports in eight years, according to statistics from the Malaysian Palm Oil Board (MPOB) released last week.

Maybank Investment Bank Bhd (Maybank IB Research) noted that MPOB’s February 2015 inventory was marginally lower month on month to 1.74 million metric tonnes.

“The key surprise was the low export figures, its lowest since Feb 2007,” it stated.

“Exports were down the most to China, mitigated only by higher Indian demand while exports to the other key markets were also down.”

The lacklustre export estimates in March, it said, will likely cap the price of crude palm oil (CPO) upside over the next few weeks unless palm oil production turns out to be unexpectedly weak in March.

Conversely, the tight palm oil supply expectation within the first hald after a relatively good harvest in 2Q-3Q14 will buffer CPO price downside.

In a separate report, MIDF Research noted that February saw lower CPO production which it believed was partly due to the exceptionally heavy rains in East Malaysia during the early months of 2015.

“In February 2015, CPO production in Sabah and Sarawak dropped by 21.5 per cent y-o-y and 10.5 per cent y-o-y respectively. Meanwhile, CPO production declined by only 6.5 per cent y-o-y in Peninsular Malaysia,” it added.

For the past five years, Sabah and Sarawak have on average contributed approximately 46 per cent to the total palm oil output in Malaysia.