Palm oil prices have "upside potential" - eventually – after
three successive monthly declines which has driven their discount to Chicago
soyoil to more than $200 a tonne, from levels less than half that earlier in the
While palm oil prices, of 2,945 ringgit a tonne according to
benchmark contract on the Kuala Lumpur futures exchange, are some 19% lower
than their April high, they have "troughed at elevated levels", Standard
Chartered analyst Abah Ofon said.
In late 2008, during the world economic recession, they fell
below 1,500 ringgit a tonne.
Their current relatively high level, by historical standards,
reflects "underlying robust structural support for the edible oils complex, in
spite of currently sluggish demand" for palm oil itself.
A fall-off in demand was evident in the decision by Malaysia,
the second-ranked palm shipper, to raise to 5m tonnes, from 3m tonnes, its
quota of the vegetable oil which could be exported tax free, Mr Ofon said.
"We view this as a measure to cope with slower demand,
stiffer competition from [top-ranked exporter] Indonesia and India's decision to
raise import taxes on refined palm olein."
India's imports of edible vegetable oils in June were, at
303,738 tonnes, down 29% year on year.
However, "demand from China, India and the Middle East will
likely pick-up in the July-to-September quarter as stocks are drawn down", he
"We continue to see upside potential in crude palm oil
prices in the first quarter of 2013 when demand picks up, inventories are drawn
down and yield moderates further."
Indeed, palm oil's underperformance against soyoil reflects,
besides the poor prospects for the US soybean harvest, seasonal factors, Mr
"Soy prices tend to peak in July," ahead of the US harvest, "when
crude palm oil prices are nearing their trough," as the peak of the South East
Asian harvest refills inventories.
However, while the weak US soybean harvest prospects have
grabbed investors' attention, palm oil producers too are "contending with
declining yields", in the short-term an overhang in tree stress from a bumper result
Longer-term, Standard Chartered has warned of a "severe
structural slowdown in palm oil output", thanks to ageing plantations.