INTERNATIONAL MARKET REVIEW
The oils and fats market is trying to quantify the multi-layered implications of the current coronavirus pandemic. So far, the impact of Covid-19 has been almost exclusively bearish due to: • The threat of global economic recession, along with currency volatility, affecting consumer spending power and with it, demand for oils and meals around the world. • Uncertainty over near-term demand from China, which accounts for nearly 20% of world vegetable oil consumption. • A slowdown in the ‘return to normal’ for US soyabean exports that were picking up in the wake of US President Trump’s ‘phase one’ trade agreement with China. • The collapse of energy markets, questioning the recently-promised fast expansion in biodiesel use of vegetable oils, potentially depressing palm, rapeseed/canola and soya oils as well as maize (45% of US corn consumption goes to ethanol). Ironically, crude oil appeared to be heading in the opposite, upward direction earlier in the year amid US/Iranian hostilities. • Potential obstacles to the movement of commodities which, amid restrictions on people’s movement, could carry bullish as well as bearish risk. Commodities and ‘macro’ markets are behaving in shock mode as we went to press, aware that answers to the questions of duration and depth of these and other multiple impacts are possibly many months away. For the oilseed complex some key losses at this point (from the start of 2020) include Malaysian palm oil futures (down 33%), Chicago Board of Trade (CBOT) soya oil (–28%), CBOT soyabeans (–12.6%) and EU rapeseed (–17%). Prior to the coronavirus scare, politics had been heavily influencing trade, notably a political feud disrupting palm oil flows between key trading partners Malaysia and India, just as US soya trade with China seemed to be normalising. As the leading internationally traded oil, palm had been the key driver to the upside over much of the period since our last review. Extending the rally it began mid-2019, crude palm oil (CPO) on the Bursa futures market in dollar equivalent www.ofimagazine.com
John Buckley.indd 2
Turbulent times for commodities
Source: John Buckley
The coronavirus outbreak has many implications for the oils and fats market in the months ahead John Buckley
Figure 1: Malaysian palm oil futures prices (US$) had reached US$770 levels at the turn of the year as traders believed production would slow down or stall after earlier dry weather and reduced input use. That threat was accompanied by forecasts that key producers would add a few million tonnes of demand to their domestic biodiesel programmes. Top palm importers India and China were also revealed to have made steep increases in their 2019 imports for food use while third largest customer Europe had not yet cut demand as feared. However, ideas that palm might be heading for even higher prices were quickly scuppered as the New Year unfolded. India and Malaysia had fallen out over the latter’s stance on Kashmir and India’s new citizenship laws, resulting in Malaysian sales to its top customer crashing, leaving rival supplier Indonesia to pick up a trade windfall. This shift was partly enabled by India blocking refined palm olein imports from Malaysia but still allowing in over 1M tonnes from Indonesia. As China’s palm oil demand was questioned by coronavirus, Europe continued to import less and energy markets continued to weaken. Palm oil stocks fell to new lows but more slowly than expected and the inflated price quickly returned to the low US$500s – its steepest drop for some years.
One question was whether Malaysian palm exports would pick up from their January/February lows after a near 30% fall. Pakistan and some other buyers had been taking more and early reports suggested March and April Malaysian trade was looking more promising, partly due to the approach of stocking up for Ramadan and partly a general consumer response to much cheaper prices. A change of Malaysian prime minister also appears to have opened the door to a calmer relationship with India that may help restore palm trade. On the downside, Indian refiners continue to demand their government curb olein imports to protect their margins and avoid discouraging domestic oilseed farmers. Malaysia also announced full implementation of a 20% palm biodiesel programme to take up to 1.06M tonnes annually although where that stands amid sub-US$30/barrel oil is anyone’s guess. Also bearish were new EU measures to restrict potentially harmful contaminants in refined edible oils which its producers say unfairly targets palm with lower limits than applied to competitor oils. The market now waits to see if Asian palm oil production does slow in the first half of 2020 as some analysts have forecast. Dry weather and less fertiliser use take many months to work through to u OFI – MARCH/APRIL 2020
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