Crude Palm Oil price correlation
The first trace of crude palm oil (CPO) in human history dates back to a 3000 BC Egyptian tomb in Abydos during which it was used for food and medicinal purposes. Through the ages, its applications have diversified into uses such as as a machinery lubricant during Britain’s industrial revolution. Recently, it has emerged to be a feedstock for biodiesels due to the environmentally friendly movement and concerns over petroleum prices. Blessed with suitable tropical climate and intense Research and Development, the crude palm oil market today is dominated by Malaysia and Indonesia which together accounts for 86% of global production. In this post, we will be introducing a brief overview of crude palm oil and analyzing the price correlation between palm oil substitutes.
A palm oil plantation in Malaysia
Some facts about crude palm oil are listed below but are non-exhaustive:
- Deep reddish colour of CPO reflects its high content in natural carotene and vitamin E.
- CPO is often confused with palm kernel oil, which has different fatty acid composition and comes from a different source.
- As with other crude oils, CPO can be refined and processed to remove purities such as trace metals and fruit shells before it can be used for wider applications. The most popular refining technique is RBD, which stands for refined, bleached and odorized.
Palm fruits are first removed from the spike-laden bunch stem either by manual labor or by the mechanic bunch thresher. During the milling process, the fruits are sterilized, digested under high temperatures and pressed. CPO is extracted and separated from the palm kernels.
Price correlation between palm oil substitutes
Global edible oil production
In the previous post about palm chemical industry analysis, I listed some factors about palm oil market such as adverse weather conditions, increasing environmental concerns and price of related commodities. Today, we will be analysing more in depth towards price correlation with regards to crude palm oil.
Price correlation between palm oil substitutes(i.e. in this case, edible oils) is understandable from the figure above. However, the crude palm oil market is actually much more complex than it seems.
In the long run, end users will be inclined to switch to another edible oil if one product becomes too expensive while producers will have the incentive to increase production of the higher-priced product. This trend is reflected in the figure 2.
In the short term, the prices may correlate differently. Soya bean oil, the popular edible oil after palm oil, is produced mostly in USA, Brazil and Argentina. There may be a year during which these regions have exceptionally high soya bean yield while drought in SEA results in low palm oil supply. Palm oil scarcity will result in its high price and an increase in demand of soya bean oil. However, this demand increase will not compensate the high abundance of soya bean oil and its price remain low.
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