Palm Oil Market Faces Oversupply, Falling Prices

04 December 2000 00:00  [Source: ICB Americas]

By Doris de Guzman

Facing higher production and stock levels, the palm oil market is experiencing downward pricing pressures. Attempts by Malaysia and Indonesia to improve the depressed conditions by either eliminating or reducing export duties have produced mixed results. Meanwhile, India's decision to raise palm oil import duties may further contribute to declining prices.

Record large palm oil production in Malaysia, combined with rising stock levels due to higher carry-over stocks at the beginning of the year, have depressed palm oil prices. In the third quarter, crude palm oil (CPO) production in Malaysia increased 20 percent to 2.91 million tons compared to 2.42 million tons in the second quarter. Malaysia, along with Indonesia, are the major CPO producers, accounting for 80 percent of global production. Other key producers include Nigeria, Argentina and Brazil.

Analysts point to the oversupply in the market. "Right now, there is a lot of supply, and prices are at the lowest level they have ever been," says one analyst. "Although there's some spike in demand, supplies still exceed demand as a result of a series of accumulation in stocks in both Malaysia and Indonesia, [but] more so in Malaysia."

To help reduce stocks, in early September Malaysia selected seven firms to export 500,000 tons of duty-free CPO to India and Europe. In turn, Indonesia reduced its export tax for CPO from 10 percent to 5 percent. The refined, bleached or deodorized palm oil (RBDPO) and refined, bleached or deodorized (RBD) palm olein export tax was reduced from 6 percent to 2 percent. Indonesia does not impose an export tax for RBD palm stearin.

CPO is used mainly to produce RBDPO. RBDPO is then further fractionated to produce RBD palm olein and RBD palm stearin. RBD palm olein is used mainly in the manufacture of cooking oil, margarine and processed foods. RBD palm stearin is primarily used in making soaps and detergents.

Malaysia's palm oil market is facing another threat as India, the world's largest edible oil importer, has increased its import duties on edible oils. Late last month, India increased the basic duty on CPO for the manufacture of vanaspati to 25 percent from 15 percent and for CPO other than vanaspati, from 45 percent to 55 percent. RBDPO and RBD palm olein import duties were hiked to 65 percent from 35 percent.

Malaysia is the main exporter of RBD palm olein to India. Indonesia prefers to export its products in the form of CPO, which gives Indonesia a larger stake in the Indian palm oil market as the hefty increases in import duties led to a massive price differential between refined and crude edible oils.

Analysts are uncertain as to the effects that the new hike will have on the palm oil market. "India's new hike on the palm oil import duties could have an effect on the palm oil market, but it is too soon to tell," says an official with the US Department of Agriculture. "Although in the past, every time India has an increase, prices in Malaysia have come down by the same amount."

Malaysian palm oil prices are already declining. The October price for Malaysian RBDPO sank to a historical low of $228 per metric ton, compared to September's $260 per metric ton, according to USDA. The $228 price represented a 34 percent low from last year's October price of $347 per metric ton.

Many expect the downward pricing trend to continue next year although a slight decline in current inventories may have some impact. "Although production is in the process of declining in the next few months, inventory is probably going to stay relatively high but not as much as the present time," says one trader. "But we are getting close to seeing more of a sideways to slightly upward pricing pattern in the palm market," he adds.

Others are less optimistic. "There is still not much expectation on trade since there is a world glut of oilseeds in the market, which would leave palm oil stocks almost unchanged at a high level. Unless there's a situation that would curtail production in Indonesia and Malaysia, we expect the same situation to continue next year," says one analyst.

EPOXIDIZED OILS--Crompton Cor- poration's polymer additives group will increase the price of the following Drapex epoxidized oils by 3c. per pound, effective immediately or as contracts allow: Drapex 6.8 epoxidized soybean oil, Drapex 10.4 epoxidized linseed oil and Drapex 4.4 epoxidized octyl tallate.

METALLIC STEARATES--Dover Chemical Corporation will produce Doverlube calcium stearate and zinc stearate at its new facility in Dover, Ohio beginning in early 2001. Production for magnesium stearate and aluminum stearate will follow.

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