Ahead of China's biggest celebration, palm oil demand seen lukewarm

Malaysian palm oil futures rose 2 percent on Tuesday, a second consecutive session of gains on stronger export demand and expectations of weaker production.

KUALA LUMPUR: China's appetite for palm oil heading into the Lunar New Year holiday may be lower than expected as plentiful supplies of rival edible oils curb consumption ahead of its largest festive celebration, traders and analysts said.

Palm oil traders had been counting on demand from China, the world's second-biggest palm oil buyer, to increase and support prices that have slumped 14 percent since November on rising stockpiles in No. 2 producer Malaysia.

But China's own edible oil inventories have also been rising after record soybean imports and strong purchases of rapeseed oil, reducing buyers' appetite for more. Combined stocks of soybean oil and palm oil recently climbed to more than two-year highs, according to agribusiness research firm Cofeed, while rapeseed oil inventory is also higher than normal.

"This is supposed to be the buying window for China, however, demand is weak now as rapeseed oil is flooding the market," said David Ng, analyst at Phillip Futures.

"Soybean supplies are also heavy in China, causing weakness in palm oil demand."

Chinese imports of soybeans jumped to the third-highest volume on record in December on strong demand ahead of Lunar New Year and healthy crushing margins.

China imports soybeans to crush into meal for animal feed, leaving soyoil as a byproduct. The country has also sold over 150,000 tonnes of rapeseed oil reserves since the start of this month.

Edible oils in China, mainly used for cooking, are largely from domestically grown and imported soybeans, imported palm oil and smaller crops such as canola and rapeseed.

The Lunar New Year, which starts on Feb. 15, typically sees higher consumption of palm oil as dishes are prepared for the festivities.

An analyst based in Shanghai pegged China's palm olein imports at 270,000 tonnes in January, saying it could decline to 170,000 tonnes next month.

"The vegetable oil spot market is really weak. The high stocks have prevented any big price rally in China," he said, declining to be named because he was not authorised to speak to media.

But China's full-year palm oil demand is forecast to increase as higher global output tames prices, encouraging more buyers.

China's palm oil imports in 2017/18 are seen at 3.85 million tonnes versus a previous estimate of 3.75 million tonnes, the Chinese agriculture ministry said last week. - Reuters