21/11/2008 (The Star Online) - The current large discount in the crude palm oil (CPO) price of US$300 to US$330 per tonne against soybean oil will further boost local palm oil exports in the next six months, but CPO price will remain depressed due to high stockpiles, analysts said.

However, the big price gap would not sustain in the longer term as the demand for CPO strengthened due to the steep discount, they said.

Palm oil, a rival to soybean oil, can also be used as its substitute.

Analysts and industry players told StarBiz that palm oil’s price discount to soybean oil would encourage “downtrading” as consumers switched to cheaper edible oil alternatives during the current economic downturn.

The downtrading trend was clearly reflected by the encouraging growth in local palm oil exports to major consuming countries over the past six months, they said.

“Industry players we spoke to believe that unless an application requires soybean oil specifically, there is no reason why consumers will not switch to palm oil,” OSK Research analyst Alvin Tai said.

Soybean oil’s premium over palm oil peaked at an unprecedented level of US$439 per tonne in August, but has eased to about US$320 currently, which was still high compared with the eight-year historical range of US$110 per tonne.

But Tai expects the soybean oil premium to normalise especially under the current economic conditions.

“The question is whether palm oil price will rise or soybean oil will fall to narrow the price difference,” he said.

The Government’s move to raise CPO export quota to three million tonnes from two million could further improve exports and lower the present 2.1-million-tonne palm oil inventory.

While biodiesel initiatives between Malaysia and Indonesia would not immediately address the high inventory situation, Tai said current developments suggested the present high inventory would taper off in 2009 and CPO prices could react positively to it.

Ivy Ng, an analyst with CIMB Securities, concurred that the price discount between CPO and soybean oil should narrow over time as consumers switch to cheaper edible oils, thus shoring up demand for CPO.

She expects the order flow for palm oil to recover gradually as “we believe some consumers are holding back very little stocks due to the volatile CPO prices.”

Tradewinds Plantation Bhd chief executive officer Chan Seng Fatt said “the current market has lost its senses.”

“The big price discount (CPO to soybean oil) is not justifiable for the long term,” he said. “It is a matter of time before the price gap narrows and demand for CPO improves as it is only logical for consumers to look for a cheaper alternative in CPO, which is not inferior to any other edible oils.”

Ta Ann Holdings Bhd managing director Datuk Wong Kuo Hea said he was more concerned about the possible dumping of CPO from Indonesia given the large price discount.

He expects the CPO price to remain at RM1,300 to RM1,600 per tonne within the next six months.

Glenealy Plantations (Malaya) Bhd managing director Yaw Chee Ming said the current price gap would be temporary.

“It is a matter of major consuming countries balancing their purchases of CPO and soybean oil in the advent of huge oversupply situation and the global economic crisis,” he said.