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Palm Oil’s Scorching Rally About to Burn Its Top Customer

Atul Prakash and Anuradha Raghu
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Palm Oil’s Scorching Rally About to Burn Its Top Customer

(Bloomberg) -- Palm oil’s meteoric rally in the past few weeks will almost certainly come with a cost -- shrinking sales to its largest customer.

India, the world’s biggest buyer, will shift some purchases to other edible oils this winter after palm’s surge of about 30% from last month’s low. Palm’s discount to top rival soybean oil has contracted to the smallest in almost a decade, reducing its traditional appeal as a cheaper vegetable oil.

“Higher prices are a deterrent for buyers,” said Gnanasekar Thiagarajan, head of trading and hedging strategies at Kaleesuwari Intercontinental. “The Indian market was flush with oil before this rally started heating up. That’s why there’s no rush to buy.”

While India typically reduces its imports of palm oil during the three months starting December, a bigger than usual decline in sales to the South Asian nation could dent palm’s rally. India mainly imports palm from Indonesia and Malaysia, the world’s largest producers.

Palm oil prices have surged since July on expectations Indonesia will boost biodiesel consumption, with benchmark futures in Kuala Lumpur outperforming soybean oil traded in Chicago and the Bloomberg Commodity Index. Futures capped their best weekly advance since 2016 in the five days to Nov. 22.

Indian imports may slump about 15% in the three months from Dec. 1 compared with a year earlier, according to Thiagarajan. Sathia Varqa, owner of Palm Oil Analytics, and G. G. Patel, managing partner of GGN Research, estimate that purchases will drop by 7.5% to 2.2 million tons.

The South Asian nation, which imports about 70% of its edible oil, usually cuts back on palm in winter because the cold solidifies the oil and turns it cloudy. Users tend to switch to other oils that look transparent and don’t crystallize.

Spread Contracts

Though palm is still cheaper than soybean oil, its spread has narrowed to about $18 a ton from $150 in October. That shrinking discount to soyoil is likely to prompt buyers to switch over, Palm Oil Analytics’ Varqa said.

Still, those desperate for palm will have little choice but to buy at higher prices. Some companies postponed purchases amid a spat between India and Malaysia last month and were caught off-guard by the rally, said Rajesh Modi, a trader at Sprint Exim Pte in Singapore. Buyers wishing to re-stock will want to do so before export levies in Malaysia and Indonesia kick in next year, he said.

“They’re waiting for prices to fall and then will buy hand-to-mouth,” Modi said. “For two months they held back aggressively and just bought only minimum levels. Now they don’t have much stock and don’t have a choice.”

(Updates palm oil’s spread to soyoil in 8th graph)

--With assistance from Pratik Parija.

To contact the reporters on this story: Atul Prakash in New Delhi at aprakash51@bloomberg.net;Anuradha Raghu in Kuala Lumpur at araghu3@bloomberg.net

To contact the editors responsible for this story: Anna Kitanaka at akitanaka@bloomberg.net, Atul Prakash, James Poole

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