Across June and July of this year, palm oil prices experienced a significant crash following several months of sustained high levels. Front month futures for palm oil on the Bursa Malaysia Derivatives exchange peaked at RM8136 per tonne on 1st March as part of a wider spike in the edible oil market following Russia’s invasion of Ukraine, and continued to stay within the RM6000 to RM8000 range until diving down to remain below RM4500 since late June. The price has drifted even lower in recent weeks, and has been idling below RM3500 per tonne so far in October.
BMD Palm Oil Futures Prices over the past 12 months, including ChAI’s 3 month forecast
Due to the decline since Q2, palm oil prices are now approaching a low point at which demand for the controversial commodity may increase as buyers and traders look to switch from purchasing alternatives, such as soybean or sunflower oil. A leading FMCG brand uses ChAI’s palm oil forecasts to assess these market movements in their production planning to conduct this kind of substitution analysis. By comparing ChAI’s forecasts for both soybean and palm oil, they are able to pinpoint periods of time during which they can improve their margin by switching between the two oils. Furthermore, they are also able to create more accurate budget forecasts for the company’s total expenditure on edible oils by utilizing ChAI’s price predictions.
Stocking Up
While other edible oils have crept up in price recently, palm oil has been subdued primarily due to a massive build up of stocks in Indonesia and Malaysia, the two primary producing nations for the oil. According to Reuters, the end-of-August palm oil stocks in Indonesia was 4.04 million tonnes, while in Malaysia inventories had reached a near 3-year high at 2.32 million tonnes by the end of September. With record levels of supply, it is unsurprising that prices have remained within a lower trading range in recent months. Furthermore, as it is still currently the peak production season for palm oil in southeast Asia, there is still room for these inventories to swell further. Reuters reported that crude palm oil production in Malaysia grew for a fourth consecutive month in September, by 2.6%.
Compounding the effect of plentiful inventories, demand for palm oil has also been lower in recent months. This stems, in part, from the issues that Indonesia and Malaysia faced earlier in the year in regard to exporting; the former implemented numerous U-turns on its export policy stance, while the latter struggled to rebuild its traditional migrant labour force following the pandemic. The cumulative impact of these issues was to weaken demand for oil, as many traders sought out alternatives in response to the uncertainty within the palm market.
Upward Pressure
Although inventory data alone suggests a bearish picture for palm, there are a number of forces within the market that could push the price back up. Increasing demand for the commodity was reflected in a significant jump in export figures from Indonesia between July and August; 2.71 million tonnes were exported in the first month, rising to 4.33 million tonnes in the following month. Currently much of this demand is being driven by India, with traders switching to purchase palm as it has become cheaper than soybean oil, however the prospect of a significant upsurge in pricing remains if China moves beyond its Zero-Covid policy. Indeed, this is the view of Malaysia’s Commodities Minister, Zuraida Kamaruddin, who expressed this sentiment at the start of October.
Elsewhere, the conflict in Ukraine has meant that only 20% of the land sown with sunflowers has been harvested this year, a figure that equates to half of the previous crop according to Cargill Risk Management’s October highlights report. As the largest global producer of sunflower oil, there will likely be a shortage in sunflower oil in 2023 which will be reflected in both a higher price and increased demand for alternatives, such as palm oil.
Finally, the shortage in refined crude oil products around the world is increasing the demand for biofuel, for which palm oil can be used as a feedstock material. This pattern of consumption for edible oils would likely raise prices across the board, not just for palm.
