Palm oil set for better fortunes after pandemic
Sector seen headed for recovery in second half of year
KUALA LUMPUR: Palm oil is heading for a recovery in the second half on improving global demand and dwindling output, months after the coronavirus shattered the tropical oil’s stunning bull run.
Demand for the world’s most-consumed cooking oil, used in everything from chocolate to ice-cream, lipstick and shampoo, is poised to recover as lockdowns across the globe begin to ease and major consumers, including China and India, are boosting purchases to replenish stockpiles.
The Malaysian Palm Oil Council predicts prices will hit a peak of RM2,594 per tonne in the second half, and average at RM2,337 this year, if Indonesia and Malaysia proceed with their biodiesel blending mandates as planned, and Europe’s oilseed production eases, paving way for buyers to switch to palm.
Benchmark futures in Malaysia, now trading at around RM2,318, started racing higher at the end of 2019, before the coronavirus pulled the plug on demand, first in China and then in other major consumers, as governments shut borders and businesses to stop the spread of the pandemic.
Facing unprecedented headwinds, prices started tumbling in January and slumped to a 10-month low of RM1,946 a tonne on May 6, as fruit yields picked up pace, stockpiles ballooned and biodiesel programs in top growers Indonesia and Malaysia came under heavy scrutiny.
Veteran analyst Dorab Mistry called it a “cruel season” for palm oil. Prices have dropped 23% so far this year, compared with an 18% decline in rival soybean oil.
Concerns about a new wave of virus infections, extended lockdowns in some countries and re-emerging trade friction between the US and China may cloud palm’s outlook.
The impact of dry weather and reduced fertiliser application by farmers last year have spilled into 2020, hurting production of palm fruit. While output in Indonesia and Malaysia probably gained in the January-june period, yields in the second half, which accounts for about 60% of annual production, may wane.
Indonesia’s crude palm oil production may be one million to two million tonnes lower than last year’s 44 million tonnes due to dry weather and less fertiliser usage, according to Fadhil Hasan, director at PT Asian Agri, one of the largest growers.
Output in Malaysia may drop 4.3% to 19 million tonnes due to biological stress on trees and limited labor supply, according to the Malaysian Palm Oil Board. “Going into the new normal era, we must evolve into more efficient operations as this is a labor-intensive industry,” said Joko Supriyono, chairman of the Indonesian Palm Oil Association.
“The pandemic is a trigger for the industry to change -- we can no longer enjoy good margins, and to exist in any market we must became more cost-efficient.”
The appetite for palm oil may recover in the coming months as lockdowns are relaxed across the world, especially in India and China. However, it’s still uncertain whether consumption can fully recover.
Malaysia is poised to benefit as India and China open up, prices are relatively lower than Indonesian rates and trade ties between Malaysia and India are warming, said Sathia Varqa, owner of Palm Oil Analytics in Singapore. Edible oil consumption will return, while oleochemicals demand will surge due to its use in personal hygiene products such as soaps and hand sanitizers, as well as personal protective gear.
However, palm is still facing a supply glut, which may climb to a peak that’s “well above” three million tonnes by the year-end, James Fry, chairman of LMC International, said at an online seminar last week.
Biodiesel demand may still suffer as people continue to avoid traveling around the world, according to Howie Lee, an economist at Oversea-chinese Banking Corp in Singapore. Indonesia’s political will to maintain its B30 biofuel mandate is also at stake, he said.
Indonesia’s trade ministry now expects biofuel consumption at close to eight million kilolitres this year, down from a target of 9.6 million kilolitres at the start of the year.
Malaysia has postponed its B20 mandate, or 20% blending with diesel, in parts of the country as the pandemic delays the infrastructure push needed for higher biofuel use.—