Palm oil demand strong as top buyers China, India restock inventories

A narrow discount to a rival edible oil could limit demand growth moving forward: Analysts

Palm oil demand is expected to remain robust for the rest of the month as key consumer countries India and China rebuild low stock levels, bucking a seasonal trend in which shipments of the tropical oil typically taper off at year-end.

A narrow discount to a rival edible oil, however, could limit demand growth moving forward, say traders and analysts, since buyers usually switch to more favoured soy oil when its price premium over palm narrows.

The price differential or the spread between palm oil on the Bursa Malaysia Derivatives Exchange and Chicago Board of Trade soyoil has been hovering between $80 and $90 a tonne, soy oil's narrowest premium over palm since February.

"For October we're looking at a 10 to 13 percent gain in exports, mainly from China and India, though India demand may slow compared to the previous month," said David Ng, a derivatives specialist at Phillip Futures in Kuala Lumpur.

"The current spread could be a limiting factor for demand (for palm oil), but major destinations are lacking palm this year, so they are restocking their inventories," Ng said.

India, in particular, has been seeing shortages in its domestic vegetable oils supplies, he said.

India and China are the world's top two buyers of palm oil, and command a substantial share of global demand. Palm oil import demand from China and India, which celebrate the Mid-Autumn and Diwali festivals respectively this month, had already gained in September as buyers stocked up ahead of the events.

Malaysian shipments overall rose in September over August with notable gains in Chinese demand, according to data from the Malaysian Palm Oil Board.

Also, the most recent export data from the Indonesian Palm Oil Association showed a 24 percent monthly gain, with shipments to China and India rising.

Port stocks in China in October are at half of their peak levels this year, despite having risen from a yearly low in August.

"Consumer countries had been waiting for prices to decline in the second half of 2017, but prices held steady and did not fall significantly," said Alan Lim, plantations analyst at MIDF Research.

Lim expects palm's spread or discount against soy oil to range between $80-100 per tonne until year-end, but "whether the discount can maintain will depend on the weather in Brazil".

Soybean production in Brazil, the world's second-largest producer, is likely to be smaller in the 2017/18 season compared to the prior crop year due to less favourable weather.

"If soybean output declines and soy oil prices go up, we expect that palm oil demand will increase," Lim said.