While Malaysia, the world's second largest producer of crude palm oil (CPO), is seeking to export more palm oil to China following Prime Minister Najib Razak's visits to China, it may be a tall order this year, as soybean supplies remain ample and Indonesia, another major CPO producer, still has its competitive advantage over Malaysia.
"China's demand for palm oil depends on how competitiveness is CPO price against soybean oil, the availability of domestic edible oils in China as well as the release of rapeseed oils reserves by the government," Ivy Ng, the regional head of agribusiness of CIMB Investment Bank, told Xinhua.
According to Bloomberg data, CPO trades at about 80 U.S. dollars per ton lower than that of soybean oil currently, which is below its 10-year historical average discount of 140 U.S. dollar per ton.
"From historical standpoint, the discount is not as wide or attractive relative to historical average discount. It does not make it very attractive for them (Chinese) to buy more than historical average consumption now," Ng added.
According to a recent report written by UOB Kayhian Research, soybean planting is expected to continue increasing to meet growing demand from China as meat consumption soars.
This is a long-term negative to palm oil industry as ample soybean supplies will put a lid on soybean and soybean oil prices, it said.
Soybean has recorded five consecutive years of good production. The U.S. Department of Agriculture (USDA) has forecasted that total cropland for soybean cultivation will exceed 1 billion hectare worldwide in the next decade.
UOB Kayhian also noted that there is an increasing soybean demand from China as more than 80 percent of China's soybean imports are crushed for soymeal, which is the animal feed for chicken and hogs.
In comparison, China's demand for palm oil has been stagnant for the past 10 years at the level of 5 million to 6.6 million tons.
"Even though China's edible oil import could continue to increase, Indonesia's competitive pricing could well give it a competitive edge over Malaysia," OCBC Bank's economist Barnabas Gan told Xinhua.
Gan listed an Indonesian export revision, with amounts due expressed in dollars rather than a percentage of the price, as one factor that has enhanced the competitiveness of Indonesian palm oil.
Currently, Indonesia still commands the lion's share of palm oil exports to China. The world's largest palm oil producer exported 1.3 million tons to China, versus Malaysia's 650,000 tons from January to May. Last year, Indonesia also dominated palm oil exports to China (2.6 million tons), in contrast with Malaysia's export (1.8 million tons).
Malaysian Plantation Industries and Commodities Minister Mah Siew Keong said earlier that the Malaysian government hoped to reclaim the country's position as the world's major exporter of palm oil to China.
According to Gan, Malaysia's export of palm oil and its products have recovered since August last year after nine months of contraction (excluding March 2016's growth of 7 percent).
"Chinese commodity demand has been healthy year-to-date, but Malaysia's palm oil export growth to China could possibly decelerate into the second half as the low base effect fades," Gan added.
He also noted that the total palm oil import demand in Malaysia is set to fall this year as Europe moved to restrict imports of unsustainable palm oil.
With supply growth likely to accelerate into 2017 and seasonal demand fading after the Ramadan celebrations, he expects the downward trend of CPO prices will continue in the second half.
"Given the weaker prices of late, we downgrade our palm oil price target to 2,250 ringgit (524 U.S. dollars) per ton at year-end," he said.
According to Malaysian Palm Oil Board, CPO price has fallen to 2,543 ringgit per ton as of June 29, from its peak of 3,344 ringgit in February.