Palm oil has been hit by a double whammy --- prices have come under intense pressure in recent weeks as a result of lockdown-induced demand destruction in major consuming destinations as well as the collapse in the crude oil market. Palm’s support factors have weakened considerably.

Covid-19 pandemic has disrupted global supply chains. Palm oil imports into two of the largest markets – China and India – have fallen considerably, not for the same reason though. Last year, African swine fever and trade war with the US combined to force China to substitute soybean with palm oil.

Now that the disease has come under control, demand for soybean for animal feed purposes has revived. Phase One agreement between the US and China is also in place since the beginning of the year. So, palm oil has become the natural casualty.

Curbs in India

In India, restriction on refined palm oil import is in place. Additionally, there are signs that the policymakers are ready to impose severe restrictions, including quantitative ceiling, on vegetable oil imports in order to support domestic oilseed growers.

An important demand side factor that caused a price rally in the last quarter of 2019 is seen petering out. Indonesia’s much-touted B30 blending programme is reportedly floundering in the face of the massive collapse in crude oil prices. The actual usage is expected to fall considerably short of the target. Again, discretionary blending demand in other markets has all but evaporated because there is little incentive.

Crude palm oil production in 2019-20 is now estimated at 73.3 million tonnes (mt) — comprising Indonesia’s 42.5 mt and Malaysia’s 19.7 mt. Smaller origins such as Thailand, Nigeria, Ivory Coast and others account for the rest. With the start of the peak production season, inventory is likely to build up very fast with limited number of buyers on the horizon.

Production prospects

If anything, palm oil production prospects for 2020-21 are brighter with projected aggregate output of 75.8 mt. Malaysia’s production is expected to rise by one million tonnes and Indonesia’s by 1.5 mt.

Demand destruction combined with anticipated expansion of production is a sure recipe for the palm oil market to continue to stay under pressure. (See BL commentary March 20). Fortunately for palm oil, the crude oil market is beginning to show some signs of life. Brent has moved closer to $25 a barrel.

Weak fundamentals

But it is unlikely to support palm oil markedly because palm’s own fundamentals have turned weak. No wonder, at Bursa Malaysia, CPO is trading below MYR 2,100 a tonne. Indonesian CPO is available at $555 a tonne cost and freight for May shipment.

Clearly, palm oil is a demand side story and portends for the months ahead are ominous.

The writer is a policy commentator and

agri-business specialist.

Views are personal.

comment COMMENT NOW