Crude palm oil (CPO) may test the crucial support level of 2,000 ringgit per tonne in the second half of the current year on additional supplies from the world’s two largest manufacturers — Indonesia and Malaysia.
Speaking at Malaysia-Turkey Palm Oil Trade Fair & Seminar in Istanbul on Tuesday, Dorab Mistry, director, Godrej International, said that the two countries were estimated to produce 3.86 million tonnes of additional palm oil this year. This means the world would have to absorb an additional 640,000 tonnes of CPO each month from July through December.
In the first half, however, the two countries produced 17.44 million tonnes, while the combined output in the second half is estimated at 21.28 million tonnes.
The market is currently witnessing a supply shortage with Malaysia witnessing low stocks at 1.4 million tonnes since February, which is 25 days of the country’s consumption of raw material and finished goods combined. Mistry believed that the current threshold limit of 1.4 million tonnes would continue until mid-August, and by then, the price might rise to 3,000 ringgit.
Malaysian palm oil futures touched a new five-week high on Tuesday. The benchmark October contract on Bursa Malaysia’s derivatives exchange hit a session’s high of 2,345 ringgit ($672.1), a level not seen since June 26, and later settled at 2,304 ringgit.
Mistry felt that CPO might get support from the fact that a severe drought in Argentina has damaged soybean crop and brought down the output to 32 million tonnes from 47 million tonnes estimated earlier. Also, new year planting in the US declined to 76 million acres as against the previous estimate of 80-81 million acres.
Most importantly, Indian imports and consumption of vegetable oil have gone up dramatically due to duty-free imports and the consequent low prices.
Low prices have spurred per capita consumption in India’s price-elastic market. It is now acknowledged that Indian per capita consumption has undergone an upward adjustment to 1.4 kg as a result of the removal of import duty.
India produces around 3.5-4 million tonnes of vegetable oil from its kharif crop. The average combined production of vegetable oil from soybean and groundnut is less than 2 million tonnes. Even if these crops are badly affected and production declines by 20 per cent, it will only mean a shortfall of 400,000 tonnes.
In the overall context, this is not much. If prices of foodgrains, vegetables and staples rose as a result of the drought, India’s famous price elastic demand would take care of the shortfall and the country might not need to increase vegetable oil imports, Mistry added.
Total vegetable oil imports in India are likely to peak this year to 8.5 million tonnes to meet the estimated demand of over 15 million tonnes. Last year, imports were 6.3 million tonnes with total consumption at 13.5 million tonnes.