Fall in palm oil prices may spur India to default contracts

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KUALA LUMPUR (Oct 11): The decline in crude palm oil (CPO) prices have prompted concerns that buyers from India, a major importer, may renegotiate or walk away from contracts entered earlier, analysts said.

Credit Suisse analyst Tan Ting Min said it is a norm among buyers to default on earlier agreements when CPO prices decline substantially.

"India appears to be the only country among the big buyers, to have continued to import palm oil. However, there are now worries that India will start to default on its earlier contracts, as Indian importers do not want to bear the higher cost.

"The significant jump in defaults is a normal occurrence in the palm oil market when palm oil prices fall sharply," Tan wrote in a note today (Thursday).

News reports have indicated that palm oil importers in India may renegotiate earlier contracts for palm oil transactions following a decline in the prices of the commodity.

Falling prices of palm oil have prompted buyers from the South Asian nation to default on earlier agreements to import the commodity from major producers Indonesia and Malaysia. The defaults may increase palm oil inventory and add downward pressure on prices, according to the report.

The latest updates by the Malaysian Palm Oil Board (MPOB) show that the country's CPO production rose 20.43% to two million tonnes in September from the preceding month, while total palm oil inventory which includes CPO and processed palm oil increased 17.43% to 2.48 million tonnes.

Meanwhile, total palm oil exports climbed 4.49% to 1.51 million tonnes during the month, according to the MPOB.

Looking ahead, Tan expects palm oil production to peak in this month (October) on seasonal reasons.

But declining exports is a concern as it will result in palm oil inventory increasing, possibly, to another record high at three million tonnes during the month. This does not augur well for palm oil prices, she said.

"The market appears to have calmed down, especially, after the Malaysian and Indonesian governments announced that they would collaborate together to stabilise palm oil prices by managing supply.

"Although we are sceptical that anything meaningful would come out of the discussion in the short term, palm oil futures recovered to close at RM2,457 (as of Oct 10, 2012), 9% higher than the recent low of RM2,250 (as of Oct 1, 2012), Tan said.

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