MARKET DEVELOPMENT
VSA Cuts Palm Price Hopes, Citing Big Indian Stocks
VSA Cuts Palm Price Hopes, Citing Big Indian Stocks
07/09/2015 (AgriMoney.com) - Palm oil prices are in for a "difficult" time over the rest of 2015 thanks to rich supplies in India, VSA Capital said.
"A change in fundamentals is needed before the sector becomes attractive again," VSA warned.
The investment bank cut its forecast for average 2015 crude palm oil prices for Rotterdam delivery to $625 a tonne, from a previous forecast of $700 a tonne.
VSA noted that the average forecast from companies and investors in the palm oil market at the start of 2015 was $687 a tonne.
November crude palm oil (CPO) futures in Malaysia are currently trading at 2,033 ringgits a tonne (around $477 a tonne), up from a contract low of 1,863 ringgits a tonne reached last week.
Indian, Chinese supplies thick
Exports to the Indian subcontinent, which VSA notes is "typically the most price sensitive market", have been strengthening since a sharp fall of palm oil prices in 2014, but this trend is threatened by the accumulation of inventories.
"Stocks of edible oils in Indian ports and pipelines now seem to be at elevated levels, suggesting that imports might start to decrease over the coming months," VSA said.
Given the combination of entering the peak production period and India's importance to the global palm oil export market, this could add significant negative pressure to palm oil pricing.
VSA also noted restocking by China, with palm oil stocks at Chinese ports up around 80% since the start of May.
The three biggest importers of palm oil are India (9.5m tonnes a year), the European Union (6.8m tonnes a year) and China (5.8m tonnes a year), so Chinese demand has "a significant impact on pricing," VSA noted.
This week Barclays warned that the high rate of soymeal production in China would create a soyoil surplus, pressuring palm oil sails.
The thick supplies in India and China coincide with the start of the August-November season which usually brings the heaviest production in South-East Asia.
Commodity sell-off
Palm oil prices have suffered in the broad commodity sell-off sparked by concerns over Chinese demand.
Both soyoil and crude oil were hard hit in the sell-off.
Crude oil prices are correlated to biodiesel, which is produced from vegetable oils.
"Despite biodiesel only accounting for around 10% of total CPO consumption, pricing is strongly correlated to crude oil as biodiesel is seen as the swing factor in global consumption," said VSA.
Soyoil can be substituted for palm oil in many of its food and fuel applications, so lower soyoil prices are bearish for palm oil.
But with the soyoil trading as much as $70 a tonne more expensive than palm oil, the downward pressure from soyoil will be limited for the moment.
Falling production
But in the longer term, the downward trend of palm oil production is set the help prices.
"The last ten years have seen a sustained slowdown in the global year on year growth rate of palm oil production, led by decreases in Malaysia and Indonesia, as net new plantings in these countries has fallen due to scarcity of land and development restrictions," VSA said.
The bank says that potential new palm oil developments in Africa will take "many years" to offset the decline in Asian production.
"Combined with what is more likely to be a steady increase in GDP-correlated global consumption, this underscores our bullish view for palm oil over the longer term," said VSA.
El Nino boost
And for next year's prices, the effects of El Nino, which some have forecast to be the biggest on record "remains the key wildcard".
"Reports suggest that El Niño is already causing dryness in some areas of South-East Asia but this will only start having an impact on production levels in 2016," said VSA.
"However, speculative buyers might drive the commodity price up in anticipation of this."
"A change in fundamentals is needed before the sector becomes attractive again," VSA warned.
The investment bank cut its forecast for average 2015 crude palm oil prices for Rotterdam delivery to $625 a tonne, from a previous forecast of $700 a tonne.
VSA noted that the average forecast from companies and investors in the palm oil market at the start of 2015 was $687 a tonne.
November crude palm oil (CPO) futures in Malaysia are currently trading at 2,033 ringgits a tonne (around $477 a tonne), up from a contract low of 1,863 ringgits a tonne reached last week.
Indian, Chinese supplies thick
Exports to the Indian subcontinent, which VSA notes is "typically the most price sensitive market", have been strengthening since a sharp fall of palm oil prices in 2014, but this trend is threatened by the accumulation of inventories.
"Stocks of edible oils in Indian ports and pipelines now seem to be at elevated levels, suggesting that imports might start to decrease over the coming months," VSA said.
Given the combination of entering the peak production period and India's importance to the global palm oil export market, this could add significant negative pressure to palm oil pricing.
VSA also noted restocking by China, with palm oil stocks at Chinese ports up around 80% since the start of May.
The three biggest importers of palm oil are India (9.5m tonnes a year), the European Union (6.8m tonnes a year) and China (5.8m tonnes a year), so Chinese demand has "a significant impact on pricing," VSA noted.
This week Barclays warned that the high rate of soymeal production in China would create a soyoil surplus, pressuring palm oil sails.
The thick supplies in India and China coincide with the start of the August-November season which usually brings the heaviest production in South-East Asia.
Commodity sell-off
Palm oil prices have suffered in the broad commodity sell-off sparked by concerns over Chinese demand.
Both soyoil and crude oil were hard hit in the sell-off.
Crude oil prices are correlated to biodiesel, which is produced from vegetable oils.
"Despite biodiesel only accounting for around 10% of total CPO consumption, pricing is strongly correlated to crude oil as biodiesel is seen as the swing factor in global consumption," said VSA.
Soyoil can be substituted for palm oil in many of its food and fuel applications, so lower soyoil prices are bearish for palm oil.
But with the soyoil trading as much as $70 a tonne more expensive than palm oil, the downward pressure from soyoil will be limited for the moment.
Falling production
But in the longer term, the downward trend of palm oil production is set the help prices.
"The last ten years have seen a sustained slowdown in the global year on year growth rate of palm oil production, led by decreases in Malaysia and Indonesia, as net new plantings in these countries has fallen due to scarcity of land and development restrictions," VSA said.
The bank says that potential new palm oil developments in Africa will take "many years" to offset the decline in Asian production.
"Combined with what is more likely to be a steady increase in GDP-correlated global consumption, this underscores our bullish view for palm oil over the longer term," said VSA.
El Nino boost
And for next year's prices, the effects of El Nino, which some have forecast to be the biggest on record "remains the key wildcard".
"Reports suggest that El Niño is already causing dryness in some areas of South-East Asia but this will only start having an impact on production levels in 2016," said VSA.
"However, speculative buyers might drive the commodity price up in anticipation of this."