Palm oil futures hit limit down in Malaysia as recession fears mount

Third-month September delivery crude palm oil futures, or FCPO, in Malaysia triggered a price limit down at 12.01 pm Malaysia time after falling 10% on July 6.

In accordance with business rules and contract specifications, price limits on all FCPO contracts will be expanded from 10% to 15% during the July 6 lunch break. FCPO price limits will be at 15% for the afternoon session, according to a statement from Bursa Malaysia.

Recession fears and aggressive crude palm oil selling from Indonesia contributed to the palm oil price crash, trade sources said.

The benchmark CPO futures have since fallen more than 30% from their peak in March on account of rising Indonesian domestic and export availabilities.

"Market sentiment has been weak for some time now, and CPO crash (July 6) has made it worse," a Singapore-based palm oil trader said.

Indonesian palm oil firms will be allowed larger export quotas from July after the world's biggest palm producer lifted the export ban in May. These companies can now export at a rate of seven times their domestic sales from five times previously, government officials said.

"As of Monday [July 4], the Indonesian trade ministry issued export permits worth 2.4 million mt of palm oil under DMO [Domestic Market Obligation] scheme and export acceleration program," a Kuala Lumpur-based trading source said. "That is very close to pre-February levels. Indonesian traders are currently selling at $200/mt discounts to Malaysian CPO."

Even though the Indonesian government had allocated the quotas, export shipments have been crawling in part due to vessel constraints, palm traders said.

Fears of recession and rising borrowing costs are pushing speculative funds out of commodities, Tajgir Rahman, general manager, trading and procurement at Dubai-based Savola Foods told S&P Global Commodity Insights. Malaysian CPO futures have the potential to go down to MR3,500/mt ($791/mt), he added

Most physical palm oil traders are concerned about burgeoning Indonesian supply because demand in key destination markets such as China, India and the EU have not been strong enough to trigger a rebound in prices.

"This is a case of supply superseding demand," a Malaysian-based trader said. "It's a lot of supply for the market to digest."

For most sellers in the cash market, they would like to secure outlets as quickly as they could for their cargoes before a hike in Indonesia's palm export levy rates begin Aug. 1. Currently, Indonesia's exporters are levied a rate of $200/mt for crude palm oil, but come August the rate will be raised to $240/mt.