19/07/2012 (Borneo Post) - Rising edible oil consumption in India, as well as potentially lower production levels of its local oilseeds by the impending El Nino this season, are expected to be strong supporting factors to keep crude palm oil (CPO) prices buoyant at bullish levels.

The weakening rupee was expected to cause only a temporary setback in India’s edible oil import as demonstrated by record high levels of palm oil imports in the past.

India’s edible oil purchase declined by 13 per cent month-on-month in June to 770,000 tonnes, and could have fallen further in July, premised on the 26 per cent drop in Malaysia’s palm oil shipment for the first 15 days of this month.

OSK Research Sdn Bhd (OSK Research) analyst Alvin Tai stated, “There are concerns that the weakness in India’s import was due to the rupee’s weakness, which has impaired India’s purchasing power.

“However, we believe this slowdown is only temporary.

“India’s rupee has been on a decline in the past four to five years.

“The currency has depreciated by 33 per cent against the ringgit and 26 per cent against the Indonesian rupiah from the peak in late 2007.

“Due to the currency’s weakness, the palm oil price in rupee terms has been hovering at record levels since early 2011.

Average crude palm oil (CPO) and olein prices in rupee have been climbing for three consecutive years.” Year-to-date, the rupee was down by an average 10 per cent against the ringgit and 6.4 per cent versus the rupiah compared to the 2011 full-year average, Tai pointed out.

The analyst also stated that an El Nino this season would severely curb India’s oilseed yield and prompt a sharp spike in its edible oil import, much like in 2009.

“About half of India’s edible oil consumption is met by imports while the balance is mainly from the crushing of internally-produced oilseeds such as soybean, cottonseed, groundnut, rapeseed, and castor seed.

“Hence, an important factor driving India’s edible oil imports is how well its crops turn out.

“We believe that the jury is still out with regard to India’s production prospects in the current season but we fear it may worsen.” To recap, a mild El Nino in 2009 resulted in India’s crop output ‘falling off the cliff’, thus necessitating a drastic increase in edible oil imports.

“While one should anticipate some form of demand destruction if prices reach excessively high levels, it is too early to tell if we have reached that point.

“After all, India’s first half of 2012 edible oil import is still higher by 34 per cent year-on-year this year, while its palm oil import has risen 23 per cent,” Tai noted.

“Other than the lower palm oil yield, the India factor would be the major catalyst for a strong rally in palm oil price,” he summarised.

Tai opined that palm oil price would ‘scale higher next year on the back of an El Nino-induced drought’, as reflected in a previous research report in which he raised OSK Research’s 2013 CPO price assumption from RM3,100 to RM3,500 per metric tonne.