China soybean oil-palm oil price spread turns negative

China's futures price spread between soybean oil (SBO) and palm oil (PO) fell below the breakeven point, right before the lunar new year holiday break and has since stayed negative.

This was driven by losses on SBO futures and slight increases in PO prices. The SBO-PO spread on the Dalian Commodity Exchange (DCE) turned negative on 5 February, hitting a low of -192 yuan/t (-$26.70/t) on 8 February. This was the first time since January 2022 that the spread turned negative, with the spread staying negative for 86 days back then.

Narrowing SBO futures prices accounted for the SBO-PO spread falls. The May DCE SBO futures contract slid by 7.3pc from Yn7,674/t on 24 January to Yn7,112/t on 7 February, the lowest level after it became the primary contract on DCE.

China's overall vegetable oil demand is expected to stay slow until April, as it is typically an off-season after the lunar new year holiday break. Slim domestic demand weighed on May SBO futures prices. China also imported bulk volumes of rival vegetable oils including sunflower seed oil and rapeseed oil at competitive prices in the past months, which also partially displaced SBO demand and pressured SBO prices.

Another reason for falling SBO prices was ample supplies in the domestic market. Chinese received large volumes of soybeans since late November 2023. Accelerated soybean arrivals encouraged local crusher operators to speed up processing, raising domestic SBO production and stocks.Current SBO stocks at major operators stood at around 900,000t as of last week, 20pc higher than the same period last year. SBO supplies are expected to stay at elevated levels in the first quarter of 2024.

Downward soybean futures on the Chicago Board of Trade (CBOT) also pulled China's DCE SBO futures lower. The primary May CBOT contract fell from $11.76/bushel on 19 February to $11.42/bu on 27 February, in light of expectations of ample global soybean supply in 2024. Several Brazilian domestic agencies recently revised down the country's soybean output for the 2023-24 marketing year, which will likely sustain CBOT prices for a short period, but higher production in Argentina, and expanded US soybean planting acreages suggested bumper supplies globally. This could pressure CBOT futures in the long run, and China's SBO prices on DCE.

Palm oil contract

China's DCE May PO contract rose from Yn7,164/t on 18 December to Yn7,274/t on 26 February, even hitting Yn7,544/t on 26 January, in line with palm oil futures movement on the Bursa Malaysia Derivatives.

Malaysian PO production fell to a nine-month low in January, given the impact of the continuing El Nino weather phenomenon, resulting in stock levels dropping to a six-month low of 2.02mn t in the month. PO inventories in Indonesia, the world's largest PO exporter, were also at low levels after large-scale exports in the later half of 2023.

Indonesia typically stocks up on PO ahead of the fasting month of Ramadan in March and the Eid al-Fitr holiday in April, which could result in a slower export pace and further support PO prices globally.

Falling SBO prices and sustained PO futures could cause the SBO-PO spread to narrow further until April. But the spread could increase after September becomes the primary contract on DCE.

China's DCE SBO-PO spread (Yn/t)