Palm oil imports latest casualty as China tightens credit

Updated: Thursday May 8, 2014 MYT 11:28:03 AM

Palm oil imports latest casualty as China tightens credit

Beijing’s crackdown on commodity financing in the face of slowing domestic demand could hit global palm oil demand – Reuters Photo.

SINGAPORE/KUALA LUMPUR: China’s refined palm oil imports could be hit as buyers struggle for funding, the latest casualty in Beijing’s crackdown on commodity financing in the face of slowing domestic demand.

That drive has already taken a toll on several products with Chinese purchases of iron ore, rubber and copper tumbling, while importers have defaulted on at least half a million tonnes of soybeans.

Reduced palm oil imports by the world’s No 2 buyer of the commodity would drag further on benchmark Bursa Malaysia futures that dropped to a three-month low last week on rising output in key growers Malaysia and Indonesia.

Commodities have been commonly used for financing in China, where traders or investors borrow against a product with the aim of investing the money in high-return areas such as real estate.

But faced with slowing growth and signs that authorities will not step in every time a loan goes bad, Chinese banks are becoming more hard-nosed and selective about whom they lend to.

With traders and industry officials estimating that around 70% of China’s palm oil imports are connected to this kind of financing, shipments are set to drop.

“Palm oil has strong fundamental demand in China but we might see inflows impacted as a result of tighter access to credit, among other factors including higher inventories at ports and higher supplies of soybean oil,” said Abah Ofon, an analyst with Standard Chartered in Singapore.

China does not grow any palm oil and is second only to India in imports, buying around 6 to 6.5 million tonnes a year – around 15% of global trade. Mainly sold as a cooking oil, palm is also used in products ranging from ice cream to cosmetics.

Traders said it was difficult to estimate the size of any decline in imports, but edible oil industry consultant Shanghai Pansun Information & Technology Co. Ltd said it could be around half a million tonnes this year.

HUGE LOSSES

Chinese palm oil importers could end up with huge losses, with domestic prices dropping as economic growth eases. The spread between local palm oil prices in China and the cost of importing cargoes has zoomed to a loss of 1,000 yuan (US$160) per tonne, said industry sources in China.

Although a trader in Malaysia said refined palm oil was this week quoted at US$770 a tonne in the Chinese market, about US$90 less than the cost of importing cargoes.

Buyers typically make money by selling palm oil at higher prices in the local market or suffer a marginal loss which they can recover by investing loan money in more profitable business, traders said.

“The gap in prices will result in a loss of 16%,” said Cai Nengbin, general manager at Shanghai Pansun.

“If the losses were at 5, 6 or 7%, then these traders could offset them by using the money for re-financing, but 16% is too big.”

This has resulted in palm oil stockpiles at Chinese ports climbing to 1 million tonnes compared with the usual 600,000 to 700,000 tonnes, with importers unwilling to sell at a loss.

Refined palm has a shelf-life of up to two years, while crude palm oil lasts only six months.

One palm oil producer in Malaysia said China would not allow more imports because storage tanks at ports were packed to capacity.

“The financial traders in China who bought the oil have put their cargoes in storage,” said the producer whose company also runs an edible oil refining plant in China. He declined to be named as he is not authorised to speak to media.

“They are keeping the oil in anticipation of the market going higher.”

China’s palm oil imports in January-March eased slightly to 1.47 million tonnes from 1.49 million tonnes a year ago, with traders saying a larger drop is to come. – Reuters

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

<span>%d</span> bloggers like this: