25/11/2011 (Financial Times) - Chinese traders have cancelled orders for more than 300,000 tonnes of palm oil imports, according to a government report, as slower-than-expected demand growth has depressed Chinese domestic prices for palm oil.

The cancellations are the latest sign that China’s appetite for raw materials could be flagging as economic growth gradually cools in the world’s second-largest economy. China’s gross domestic product growth in the third quarter was 9.1 per cent, its slowest pace in more than two years, and eurozone woes have depressed Chinese exports of manufactured goods, further dampening raw materials demand

The report, published by the government-run China Grain Information Center, said 300,000 tonnes of palm oil scheduled for delivery over the next five months had been cancelled, and a further 400,000 tonnes delayed from October to December.

“This is the first big order cancellations since October 2009,” said Huang Zhiqiang, palm oil analyst with Guotai Junan Futures. “Some importers had been using orders as a short-term financing channel, because once you place the order, you can get US dollars with your letter of credit.” He added that the recent volatility in palm oil prices has flushed out the speculative money, causing the rash of cancellations.

Palm oil, which is used to make the instant noodles that are ubiquitous in China, has seen prices fall steadily this year until hitting a low in early October. On Thursday benchmark prices for palm oil on Bursa Malaysia stood at $976 a tonne, down 3.9 per cent from a week ago, but up 12 per cent from the October low in dollar terms.

The contract cancellations have occurred as global benchmark palm oil prices have rebounded over the last several weeks. Chinese domestic prices for palm oil have not rebounded as quickly, partly because of inventory drawdowns, and some importers have cancelled contracts rather than import at a loss.

Analysts say China’s underlying demand for palm oil has been strong this year, growing steadily as Chinese diets become richer and include more processed foods. However a government crackdown on recycled cooking oil – where restaurant waste oil is reprocessed and illegally sold again as cooking oil – has cut into the demand for palm oil, which was sometimes mixed in with the reprocessed oil.

In addition to cooking and processed food, palm oil is also used to make soaps, cosmetics, detergents and pharmaceuticals.

China is the world’s second-largest consumer of palm oil, after India, consuming 6.3m tonnes last year, or about 13 per cent of global demand.