03/04/2008 (The Hindu Business Line), Mumbai - The big bio-fuel boom may not be coming to an end anytime soon; but artificially jacked up market prices of vegetable oils — unrelated to real demand — are in for a sharp correction. No doubt, there has been a near-collapse of soyabean oil and palm oil prices in the last few days; but it was the just removal of speculative froth.
The real decline is yet to come. Reports of an imminent European Union complaint and / or precipitate action to stop unintended windfall gains for the US bio-diesel suppliers are doing the rounds. Some reports describe the ‘splash and dash’ business as a scam. Bio-diesel from Europe is shipped across the Atlantic to the US where a dash of fuel is added and re-exported to Europe, in which rogue traders claim US Government incentives.
This is seen throwing EU bio-diesel economics haywire as it undercuts the domestic industry. It is also said that palm oil is imported into the US and converted into palm methylester and exported to Europe in which the US export house claims incentive, although it is believed the intention was to grant incentive to US origin oils (say soyabean oil) and not imported ones (like palm oil).
These sharp practices have been going for over a year as a result of which the volume of trade transactions expanded significantly, propelling prices higher. This immediately attracted speculative interest in the commodity. Soon, the splash and dash may come to an end; and global vegetable oil market would revert to its genuine market fundamentals.
Ironically, it is not so much the industry, but global warming enthusiasts who have exposed the alleged racket of transporting large parcels across the Atlantic Ocean merely to claim financial incentives. Such movement, totally avoidable, leads to burning of energy for transporting the cargo and contributes to global warming.
The bio-fuel industry has, of late, found its margins completely squeezed following sharp increase in food prices. Whether corn, wheat or soyabean, world prices spurted by anything between 50 and 100 per cent in the last one year. Palm and soyabean oils doubled to over $1,100 a tonne. The market is seen slowly correcting down, as supply pressure from the southern hemisphere increases and crop planting prospects in the northern hemisphere appear favourable.
If the splash and dash scam is ended soon, the bull run in the global vegetable oil market would come to an end. Historically, unlike bear markets, bull runs do not last long. More often than not, there is supply response to high prices. On occasions, bull runs are created by abnormal business conditions — splash and dash, for example — which inevitably come to an end.