SINGAPORE/BEIJING (April 11): Steep falls in Chinese edible oil prices have knocked soybean processing margins deep into negative territory, leading to a likely drop in imports of palm oil by the world's top oilseed buyer.

Higher vegetable oil imports in past months and regular auctions of state rapeseed oil reserves have led to a glut of edible oils, cutting the price of soybean oil futures on the Dalian exchange by 15% since end-January.

Crushing factories in Shandong, a hub for soybean processing in the country's east, were incurring a loss 253 yuan (US$36.62) a tonne last week, the biggest since early August. Margins were positive between September and February, peaking in December at 407 yuan a tonne. China's edible oils, used mainly for cooking, come largely from domestically grown and imported soybeans, imported palm oil and smaller crops such as canola and rapeseed.

Soybeans are crushed into protein-rich animal feed ingredient soymeal and soyoil. Typically, crush-margins are driven by prices of soymeal, which constitutes about 60% to 70% of the value of soybeans, but lately weak soyoil has been deemed the chief driver of crush margins.

"The fall in edible oil prices has been so steep that margins crashed," said a Singapore-based trader at an international trading company with Chinese processing facilities.

The price fall has been driven partly by the unwinding of a burst of speculative buying by local funds of edible oil futures on Dalian that pushed the market to its highest in more than two years in December, drawing in large imports.

"Higher prices on the futures exchange gave a false indication that demand was strong," said a second Singapore-based trader.

PALM OIL HIT

The fallout from the lower prices is expected to hit Chinese demand for palm oil, a tropical oil shipped from Malaysia and Indonesia.

Palm oil comprises more than 70% of China's edible imports of about five million tonnes a year. The country is the world's second-largest palm oil buyer.

"We are seeing a selloff in palm oil futures because production is improving and at the same time demand is slowing down, not just from China but India as well," said a Kuala Lumpur-based trader.

Malaysian palm oil futures slid to a six-month low on Monday.

Talk of China selling old-crop soybean reserves is also raising expectations of increased edible oil supplies.

"There are rumours that by 2018, the government wants to sell about 4.5 mln tonnes of old beans from reserves," said Tommy Xiao, edible oils analyst at widely-tracked consultancy Shanghai JC Intelligence.

Demand for imported soybeans, however, is likely to remain firm due to strong demand for soymeal for animal feed.

The US Department of Agriculture has estimated China's soybean 2016/17 imports to rise 4.6% to 87 million tonnes as the country rebuilds its pig herd.

Soymeal demand is likely to put even more pressure on soybean oil futures, already at 16-month lows, as it will increase the availability of the edible oil.

"For April to June soybean arrivals will be quite huge, and we see the crush (production) will be very big," said one China-based oilseeds trader.

(US$1 = 6.9082 Chinese yuan renminbi)