COLUMN-Palm oil faces soy oil headwind despite India, China demand: Clyde Russell
--Clyde Russell is a Reuters market analyst. The views expressed are his own.--
By Clyde Russell
LAUNCESTON, Australia, July 31 (Reuters) - Palm oil futures in Malaysia may have enjoyed their best day in seven months, but Tuesday's gains are unlikely to be the harbinger of sustained higher prices.
The benchmark 3-month contract on the Bursa Malaysia Derivatives Exchange jumped 2.2 percent to 2,215 ringgit ($684) a tonne on Tuesday, its biggest percentage rise since early January.
The gain was attributed to market hopes that exports from the world's No.2 supplier improved in July, and this was indeed the case with cargo surveyor Intertek Testing Services reporting that they rose 4.2 percent from June.
But even this bullish piece of news is unlikely to be enough of a foundation for a sustained rally.
More likely is that palm oil faces the ongoing headwind of plentiful supplies of soy oil, a complementary product in the edible oils market.
Forecasts for a record U.S. soybean crop will boost supplies of soy oil, putting downward pressure on prices.
Benchmark Chicago 3-month soy oil futures dropped to 42.30 U.S. cents per pound on Tuesday, the lowest in almost three years and down more than 20 percent from the 2013 peak reached in early February.
Palm oil futures have fallen 15.5 percent since their year high, reached in late January, but the intraday low of 2,137 ringgit hit on Tuesday and on July 26 was the weakest since October 2009.
The premium soy oil commands over palm oil has been narrowing, but this will be of little comfort to palm oil producers.
Expressed in dollars per tonne, soy oil is at $942 and palm oil at $685, a gap of $257. This is down from around $348 at the start of the year, but still a long way from the $87 that the spread narrowed to in May 2009, when the global economy was recovering after the 2008 recession.
It is likely that the spread will continue to narrow in coming months, but this will likely be because soy oil is expected to weaken at a faster pace than palm oil.
While the abundance of soy oil is undoubtedly bearish for palm oil, there are some factors that will help support prices, or at least prevent them from sliding much further.
The shape of the palm oil futures curve is suggesting that prices may be close to a bottom.
The curve is currently in backwardation at the front, shifting to contango further out.
This means that contracts up to five months out are priced lower than the benchmark three-month contract, while from six months on they command a premium.
The normal shape of the curve is mild backwardation, but it has been in contango since the third quarter of last year, a period coinciding with a declining price trend.
On the fundamentals side, demand from the world's top two buyers, China and India, remains strong, despite some weakness in June.
China imported 297,876 tonnes of palm oil in June, according to customs data. This was a decline of 24 percent from the same month a year earlier but first half imports were up 8.2 percent from the same period in 2012.
In contrast, China's imports of soy oil were down almost 25 percent in the first half and volumes were only about one-seventh those for palm oil.
India's imports of refined palm oil fell about 21 percent in June to 296,230 tonnes from May's record high of 373,837 tonnes, according to the Solvent Extractors' Association.
It was the first monthly drop since February, underscoring that first-half demand in India has been strong.
Lower palm oil prices will work to offset declines in the value of the rupee, meaning India's imports should remain robust and grow by at least 10 percent in 2013 over 2012.
Falling inventories may also act as short-term support for palm oil, with Malaysia's stocks dropping to the lowest in more than two years in June.
However, the seasonal upswing in production in the next few months should work to replenish inventories, and it will take sustained higher demand from India and China to provide a meaningful lift to prices.
(Editing by Himani Sarkar)