Palm Oil: A storm in a Pot Noodle

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”.