Palm oil demand is seen rising on a widening price differential with its rival oilseed soy, spurred by dry weather in the United States, prompting buyers to switch to the cheaper tropical oil, as key purchasing market China replenishes its palm oil port stocks, which have slid to seven-month lows.
Benchmark palm oil prices are expected to decline in the second half of the year as production sees seasonal gains. Palm has shed about 17 percent of its value so far this year, and was last down 0.4 percent at 2,566 ringgit ($598.83) per tonne on Friday afternoon.
The price differential between palm oil and soyoil on the Chicago Board of Trade, also known as the spread, is currently around $150 a tonne, soyoil’s widest premium over palm in a year.
The spread between Malaysian palm olein, or refined palm oil, and U.S. soybean oil for export is $166 per tonne. Against Argentine soybean oil, Malaysian palm olein prices are trading at a roughly $90 per tonne discount.
Soyoil prices have risen 7 percent since the start of June on reports of dry weather damaging crops in the United States, according to data from the U.S. Department of Agriculture.
“The wider spread explains why China and Europe are buying more palm… They use more soybean oil, so when the spread widens, they have no choice but to buy palm,” said Brandon Chia, an institutional dealer at Kuala Lumpur-based brokerage Okachi Malaysia.
“Soy will remain strong due to the dry weather forecasts. As long as soy remains strong, the spread should remain wide.”
Malaysia’s palm oil shipments to Europe rose during July 1-20, showed data from two cargo surveyors, up between 38-58 percent from the corresponding period last month, while exports to China surged 37-120 percent.
Low levels of palm oil at Chinese ports are also supporting its demand, as buyers in the world’s second largest palm oil consumer replenishes stocks and ramps up consumption during the summer season.
Port stocks in China have been declining since May, and are currently at their lowest levels since the start of the year.
China had held off buying palm oil as ample supplies of alternative edible oils such as soy and rapeseed flooded local markets.
“Stocks of palm oil in China are low and we have good demand during the summer here. Import numbers for the next one to two months are looking pretty good,” said a Shanghai-based analyst at an asset management firm.
“Although we have big soyoil stocks and bigger soybean crush in the future, the seasonal high vegetable oil demand will support vegetable oil prices,” the analyst said, adding that he expected to see large volumes of palm oil consumption from July to September.