According to industry officials and analysts, Indonesia's plan to limit palm oil exports, which has driven prices to record highs, is expected to make leading importer India to switch to substitute soy and sunflower oils, potentially halting the market's rally.
Officials say that while India can raise its palm oil supplies from Indonesia's rival supplier Malaysia, it is unlikely to be able to meet the shortfall.
A senior industry official said on Wednesday that Indonesia is working on a strategy to limit palm oil shipments in order to lower local cooking oil costs. Typically, Indonesia contributes 60% of India's palm oil imports, while Malaysia supplies 40%. Palm oil accounts for two-thirds of India's annual edible oil imports of 13 million to 15 million tonnes.
The news from Indonesia drove palm oil prices to a record 5,228 ringgit ($1,248.63) per tonne on Thursday, but Indian industry officials warned the surge can be tempered if India, the world's largest edible oil importer, responds by reducing purchases.
However, there may be spillover effects in other markets, such as rise in US soyoil futures and Black Sea sunflower oil prices.
Already, the palm oil rally has significantly narrowed the price gap between palm oil and soft oils, causing Indian customers to gravitate toward soyoil and sunflower oil, according to Sandeep Bajoria, chief executive of Sunvin Group, a vegetable oil trading and advisory business.
Crude palm oil (CPO) is now available at around $1,410 per tonne, including cost, insurance, and freight (CIF), in India for February shipments, compared with $1,450 for crude soybean oil and $1,420 for crude sunflower oil, traders said.
Narrowing Gap
A year ago the gap, between CPO and soyoil, often perceived to be of higher quality than palm oil, was more than $100 per tonne.
It would take time for a shift in purchasing to be reflected in delivery.
According to Bajoria, India's palm oil exports for signed contracts are unlikely to be disrupted because many manufacturers have operations in both Indonesia and Malaysia and may alter the nation of origin for a few shipments.
Palm oil arrives in India three to four weeks after traders sign contracts, while soy oil takes two months owing to the longer voyage, according to a Mumbai-based dealer with a worldwide trading business who asked not to be named because he is not authorized to speak to the media.
Govindbhai Patel, managing director of trading firm GG Patel & Nikhil Research Company, predicted that Indian buyers would migrate to Malaysia, but added it did not have capacity to fulfill the gap created by Indonesia.
Patel, who has been selling edible oil for five decades, predicts that India's palm oil shipments would fall to 500,000 tonnes in February, while soyoil and sunflower oil imports will increase to 600,000 tonnes.
While India purchases palm oil from Indonesia and Malaysia, it mostly imports soy oil from Argentina and Brazil, as well as sunflower oil from Russia and Ukraine.
Sunflower oil rates are particularly appealing to Indian customers, but dealers said they felt supply from major supplier Ukraine could not be increased beyond a certain point due to geopolitical issues with Russia massing troops near the country's borders.
