Agricultural prices unlikely to rise on food hoarding
KUALA LUMPUR: Incidences such as hoarding will not likely impact prices of commodities, says OCBC Treasury Research, as the Covid-19 outbreak will likely hamper prices across agricultural, energy and industrial metals.
Economist Howie Lee in a special note on commodity prices yesterday expect depressed prices to continue across the energy, industrial metals or agricultural space.
“There is a case for deferred consumption for most markets, but any catch up is unlikely to fully compensate the demand drawdown in this period,” he explained in the note.
“The longer the coronavirus situation lasts, the more apparent this demand slowdown would appear.”
Lee said it was high unlikely that agricultural commodities could outperform as people rush to stockpile food items.
He added that hoarding behaviour in the retail market is unlikely to have a material impact on food prices.
“Wheat, which is used to make instant noodles, have fallen seven per cent so far,” he observed.
“Soybean prices have declined 8.5 per cent and crude palm oil prices have dipped about 18 per cent.
“Even Thai white rice, despite the drought that is going on in North Thailand, has seen prices coming off.
“The reason is simple. Food consumption is heavily linked to income and in addition, China, the epicentre of the coronavirus, has the largest population in the world.
“A pullback on spending is expected and whether the choice of staple is white rice, pasta or instant noodles, demand for raw food materials is going to be impacted to the downside.”
The same can be said for rubber prices, Lee said, as demand for rubber gloves in healthcare is set to rise exponentially yet rubber prices are down as much as 17 per cent.
“Firstly, only about 10 per cent of natural rubber is used in latex products. The bulk of rubber demand – around 65 to 70 per cent – still belongs to tyre manufacturing,” he explained.
“With the travel restrictions in China, poor auto sales extending from last year and the resulting economic slowdown from the virus, tyre demand is expected to slow. Any uptick in demand from gloves is unlikely to compensate the lack of tyre demand.
“Secondly, natural rubber latex constitutes about only 30 per cent of total rubber used in the Malaysian rubber glove industry, which accounts for 63 per cent of global supply. The other 70 per cent of the industry utilises synthetic rubber.”
Among the healthcare industry, the economist noted that there is a preference for nitrile gloves compared to latex gloves. Nitrile, made from synthetic rubber, has higher puncture and chemical resistance and lower allergy rates than its latex counterpart.
“It used to be more expensive, but recently breakthroughs in technology plus low crude oil prices have started to make them more affordable. Thus, even with the increased demand in rubber gloves, the increased demand is likely to flow through synthetic rubber, not natural latex.”
Meanwhile, Lee outlined concerns in the market that orders for energy products has fallen about 20 per cent in China, which suggests about two million barrels per day wiped off the market.
Further downstream, the expected demand losses should come mainly from the gasoline and jet fuel market, given the travel restrictions imposed across the country. “While industrial products like diesel and natural gas demand may see less of a downturn, this will depend heavily on how prolonged this coronavirus situation lasts,” Lee opined, advising caution with regards to the notion that energy consumption can play catch-up once the situation abates:
“Although factories can ramp up activity later on, the hit to transportation demand during the Lunar New Year will unlikely be ever recovered. That means any catch-up in demand is unlikely to be replaced 1-for-1 down the road. The longer this episode drags, the smaller this coefficient will appear to be.
“Furthermore, the coronavirus episode has occurred around the Lunar New Year, where stockpiles of crude oil and downstream products are generally high in anticipation of high commuting volumes. We expect that muted travels in that period would have resulted in higher onshore inventories than expected, which could act as a drag on energy imports into the country.”
There is a case for deferred consumption for most markets, but any catch up is unlikely to fully compensate the demand drawdown in this period.
Howie Lee