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Studying the seasonal production and export trend of crude palm oil, we find that seasonally production enters a lag phase in the coming quarter. With declining production and a tax cut would help Malaysia to restore ..

19 Oct 2012

By Kunal Shah

The recent price correction in palm oil prices was attributed to the rising stocks and production in the world’s largest palm growing nations. Palm oil prices have corrected almost 38 % this year while on the contrary other soft oils have seen an impressive rise.

The recent developments by the government of Malaysia to cut the export tax came much later after the move by Indonesia. Indonesia changed the uniform export tax rate 25 percent for crude and refined palm oil and built a differential between the oils by introducing a duty cut with effect from October 1st 2012. Export tax on refined products such as palmolein was reduced from 25 percent to 13 percent while for crude palm oil the cut was much smaller, from 25 percent to 22.5 percent. This was done with an objective to promote exports of processed oils.

Malaysian government is expected to cut crude palm oil taxes and discontinue tax free shipment quota of 5.5 million tons from January 2013, a method to regain the market share from Indonesia. Malaysian government is expected to cut the export tax to 7-10% of the price, down from its current rate of 22-23 % of the price. This is expected to boost the slow exports and curtail the piling the stocks which touched an all-time high 2.48 million tons in September.

Studying the seasonal production and export trend of crude palm oil, we find that seasonally production enters a lag phase in the coming quarter. With declining production and a tax cut would help Malaysia to restore the stock situation in the next few months.

We have witnessed the spread between soy oil and crude palm oil rising to record levels this year. Prices of other vegetable oil rose significantly this year due to shrinking supplies. Argentina degummed soy oil FOB prices rose from $1100 to $1300 this year while palm oil prices on the contrary fell from $1100 to below $900 this year. The spread between palm and soy oil has widened to as high as $400 per ton, way above the average of $ 200.

We have seen that vegetable oils like palm, canola and sunflower have historically traded at a premium to Brent. However in the recent past months we have seen that the premium of palm over brent has reduced significantly in the recent few months while premium of soy oil has increased. Demand for biofuel is expected to emerge would also help the spiraling rise of stock to slowdown and this would in turn pull up the premium for palm oil over Brent. We are of the view that palm oil prices are likely to rally by 10% going forward.

(The author is Head Commodities Research at Nirmal Bang Commodities Pvt Ltd) 


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