China and India cancel or renegotiate CPO deals

Interesting, insightful article, for future reference - http://biz.thestar.com.my/news/story.asp?file=/2008/8/16/business/1822275&sec=business

I think this article provides a good one-out-of-many explanations as to why we sometimes see when FCPO, Soyoil or other commodity prices first make a new low, they continue to make even more lower lows if the price drop is rapid. It also explains why it is dangerous to catch a falling knife, because we can never be sure that the low price caught is the bottom. I'm sure you can think of other factors too.

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SINGAPORE: Buyers from China and India, the world’s biggest vegetable oil importers, have cancelled or renegotiated around 800,000 tonnes of palm oil deals in the past few weeks as prices slump, dealers said yesterday.

The benchmark Malaysian palm oil futures contract headed for its sharpest fall in 20 years yesterday and has nearly halved since a record peak in March, which they said meant more defaults were inevitable.

“Prices have come down so fast, from US$1,200 a tonne to US$800 a tonne in 45 days, defaults are bound to happen,” said one leading buyer in Mumbai, India’s business capital. “The way the situation is, in the coming days there is the possibility of big defaults.”

Dealers said importers had defaulted on at least 300,000 tonnes of palm oil cargo in the past few weeks, while 500,000 tonnes of deals had been washed out, where traders pay lower prices than those initially agreed.

The benchmark crude palm oil October contract fell as much as RM228, or 8.7%, to RM2,392 a tonne yesterday, a level unseen since Aug 30 last year.

Malaysian exporters said Chinese buyers defaulted on 40,000 tonnes of RBD palm olein cargo yesterday.

“There is a default of 30,000 to 40,000 tonnes since morning, but obviously defaults will be much more than that as prices have come down,” said one dealer at a leading export house.

Chinese buyers said domestic soybean oil prices that had fallen more than a third over the past month were prompting defaults and washouts.

“There have been washouts and defaults over past weeks. Domestic prices have been falling too much, if they take the cargo back home, they will lose more than 1,000 yuan per tonne,” said a trader in Beijing.

Chinese buyers have been seeking discounts of RM300 to RM400 on Malaysian palm oil since last month, a Singapore-based trader said.

An Indian newspaper reported on Wednesday that traders had defaulted on vegetable oil purchases of around 150,000–200,000 tonnes because of a drop in prices.

The Hindu Business Line newspaper said Indian importers had lost up to 1.5 billion rupees in the past two to three weeks as a result of collapsing market prices.

Traders cited the example of one 30,000-tonne ship defaulted on in the past few days in India.
“The buyer refused to take delivery of one 30,000-tonne palm oil ship when it reached Kandla port,” said a trader, referring to one of India’s busiest ports located on its western coast.

Indonesian traders said exports in the first 10 days of August fell by about 100,000 tonnes compared with July after the fall in prices.

(Seng comment: The interesting thing to me is the impact on coming inventory figures. Since exports falls, will this mean higher inventory figures since CPO production is not easy to turn off in the immediate term? This is the irony of agricultural commodities like CPO, since lower prices do not necessarily cause an immediate reduction in inventory, despite economic theories drumming into our ears that low price stimulates demand and should result in lower inventory ... in the real world, time lag exists between prices, demand, supply and inventory. It also explains why when prices fall, they almost never fall in a straight line, and vice versa.)

“We’re a bit worried about India buyers because we have many deals with them,” said a dealer with a palm oil refiner and plantation firm in Jakarta. — Reuters