POINTERS: Outlook of China's Oils & Fats Market - Post Withdrawal of Financing Traders and Return of Palm Oil Stock Level to Normal

By: Mr. Cai Neng Bin

He is the General Manager of Shanghai Pansun Company. His roles and responsibilities in the company are analyzing oilseeds and oils and fats market information, with main emphasis given on systematic data analysis and make judgement on market trading pattern. He is also able to gauge the change of medium to long market trends of agricultural products, and provides trading and hedging strategies through capturing price differences arises from logical error within markets, and between different products and months.

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1. There is structural division of global oilseeds market, where local and foreign markets behave differently.
- Global soybean output continues to increase and the competition between North and South American soybean intensified. SUR of US is tighter than South America. Global output of rapeseed also declined, leading to tight supply. China abolishes the rapeseed temporary reserves policy, cutting down the needs to import rapeseed.

2. Output of China soybean declined and almost none used for crushing. On the other hand, soybean import growth remains and the withdrawal of financing traders improve the crushing margin.

3. China abolishes the temporary rapeseed reserve policy and leads to increase availability of domestic rapeseeds for auction and supply in near future. This reduces the needs for import of rapeseed and rapeseed oil, and reduction of rapeseeds stock in the country.

4. Withdrawal of financing traders also leads to significant decline of oils & fats stock level, improving the margin for imported oils & fats.

5. Lower soybean oil price competed and took some market share from palm olein in food industry but demand for palm stearin remained stable. Overall palm oil demand is expected to return to its normal level.

6. Nevertheless, import of palm oil will still be influenced by import margin and hedging activity, as stock level returned to normal level and steep discount between market price and landed cost disappeared.

7. Soybean oil remains the leading oil in the growth of China oils & fats demand. Increase in rapeseed oil supply very much depends on the extensiveness of the implementation of country’s policy but the release of domestic rapeseeds stocks to the market in inevitable. Supply-demand condition of palm oil remains stable, while distinctive seasonal demand with price fluctuation conditions maintained. Periodical or regional demand and stock changes may influence price. There is increase intensity of import hedging with the change in profit margin. Oils & fats consumption more diversified.

8. Oils &fats prices are currently at its low with upward movement expected due to the periodic tightness of stock level. El Niño effect remains the prime factor for significant price hike of oils & fats.

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Questions & Answers (1) :

Timorthy Wilfred

9 years ago

TQ for sharing China's information. The question now about Malaysia China palm oil trade is the issue of currency volatility. What sort of outlook can the palm oil business expect next few months from their trade with China amidst this currency fluctuation.

Cai Neng Bin:
With the exit of financing trader, import of palm oil in China mainly depends on difference between landed cost and DCE (Dalian Commodities Exchange) futures contract, and China will increase imports if there is any profit. Therefore, the main importing month of palm oil in China mainly falls on 1-2 months before the active trading contract month which are January, May and September. While the import margin remains as the main factor influencing the amount of imports, importers will also consider the demand and capacity of storage tank for physical delivery of futures contract concluded in DCE. At present, the deprecation trend of RMB against the U.S. dollar is detrimental for cost of palm oil import of forward contracts. Generally, importers will try to lock in the exchange rate for forward contract but the cost is different among importers. With the recent 3% downward adjustment of middle price for the exchange rate of RMB against USD by the Central Bank of China, this leads to total depreciation of RMB at 4%. Fortunately, during this period the fluctuation of exchange rate was able to be offset by the drop in FOB price as well as the rise of palm olein at DCE. Due to the weaker FOB price, this has slightly improved the China palm oil import margin and raises the import volume and physical delivery of DCE contracts. Such phenomenon also taken place in the first half of this year, where many traders also actively trading September contract at DCE, which led to sharp rise of palm oil import to be witnessed in Jul-Sep period. Unfortunately as discount of palm oil price against soybean oil narrowed, this reduces the interest to use palm oil and subsequently may reduce the import of palm oil thereafter and demand will be generally satisfied through exhausting the stock in China. The import will once again rise in Nov-Sep with the DCE January contract coming into maturity later.
9 years ago