Palm Oil: A storm in a Pot Noodle

Palm oil recently hit a five-year low, but the Chinese demand could see prices pick up.

Palm oil is one of the commodity market's more obscure sectors. But last week, Sime Darby, one of Malaysia's biggest palm oil producers, made a splash by offering £1.1bn for London-listed New Britain Palm Oil.

The deal is driven by a shift towards sustainable, environmentally friendly production methods: New Britain is one of the experts in this field. Yet Sime Darby paid an 85% premium, which to some appeared steep, given that benchmark palm-oil futures recently hit a five-year low below Rm2,000 (Malaysian ringgit) a tonne.

Demand from China and India fell below expectations in the first half, and stockpiles in Malaysia, a major supplier, are at a 19-month high.

But prices may be due a rebound. Lex in the FT notes that the palm oil price drop seems to be due to widespread stockpiling of soya oil, an alternative vegetable oil, ahead of a supply squeeze expected next year.

China's palm oil imports have been flat, yet overall vegetable oil imports are up by 17% in 2014. Longer term, ageing plantations and environmental regulations are set to hamper supply, while demand as an ingredient in processed foods is climbing.

Chinese instant-noodle production jumped by 20% last year. The recent price slide "could just be a storm in a Pot Noodle cup".

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