Palm Oil’s Slide Looks Set to Continue

September 1st, 2015

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Category: Oilseeds

palm oil 450x299(Wall Street Journal) – Palm oil hasn’t escaped the rout in commodities markets, hitting a six-year low last week. And with demand weakening and output looking healthy, analysts say the price could yet have further to fall.

The problems for palm oil, used in products from cookies to lipstick, go beyond the poor Chinese demand that has hit other commodities. Consumption has also softened in Europe, a major importer, while supplies are heading higher.

July production in Malaysia, which together with Indonesia accounts for 85% of global output, was up 9% from a year earlier, according to the Malaysian Palm Oil Board, thanks to good growing conditions early in the year.

“The downside [for palm oil] is great,” says Chandran Sinnasamy, head of trading at LT International Futures in Kuala Lumpur. “Until the world’s financial markets steady and until the concerns about Chinese demand in the market disappears, the pressure on palm oil will be there.”

Crude palm-oil futures on the Bursa Malaysia Derivatives exchange closed Friday at 1,991 Malaysian ringgit ($478.61) a metric ton, after hitting that six-year low of 1,863 ringgit a ton Aug. 25. The Kuala Lumpur market was closed Monday for a national holiday.

This global benchmark traded mostly in a range of 2,100 ringgit to 2,400 ringgit in the first part of the year. Now with last month’s drop below 2,000 ringgit a ton, traders are bracing for the next leg down, which could take the price to 1,700 ringgit next year, according to Aurelia Britsch, an analyst at BMI Research.

“Fundamentals in the palm-oil market are currently bearish for prices, amidst lackluster demand in all markets except India, ample palm-oil and oilseed supply and decreasing crude-oil prices,” said Ms. Britsch. “Moreover, we believe the ringgit will stabilize in the coming months, which will also pressurize palm-oil prices.”

The weakness of the ringgit and Indonesian rupiah—off about 19% and 14% this year, respectively, making them Asia’s worst-performing currencies—has helped keep demand from falling even farther by reducing the price foreign palm-oil buyers pay. China’s devaluation of the yuan last month, though, cut into that benefit for a key palm importer.

Recent data makes sorry reading for remaining palm-oil bulls. For the first seven months of 2015, Malaysia’s exports to the European Union and China, two of its biggest markets, were down from a year earlier by 7.2% and 7.5%, respectively, according to the Malaysian Palm Oil Board. Palm exports overall are down 1.5% this year.

Year-to-date data from Indonesia aren’t available, but its July exports to China and India were down 5% and 8%, respectively, from the previous month.

Also pressing on palm oil are cheaper soybeans. Soybean oil and palm oil make up around 62% of the world’s edible-oils consumption: When soy prices fall, palm oil tends to fall in response. Recent forecasts by the U.S. Department of Agriculture for a strong soybean harvest this year have added to fears of a global oilseed glut.

One factor that could that overturn that oilseed outlook is the weather phenomenon El Niño, which has produced drier conditions that could reduce palm-oil yields and supply later in the year.

“In March and in the middle of the year it has been much drier so I think that should impact production as we move away from September and October (when seasonal production peaks) and probably give some support to prices,” said Pawan Kumar, an analyst with Rabobank in Singapore.

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