Selling for less
Commodity producers face another rough year worldwide, but some hope seen for palm oil and rubber in Southeast Asia. By Tanyatorn Tongwaranan
The broad-based weakness in key commodity prices will extend throughout this year as the modest recovery in oil prices, ample supplies, weak demand, and the strengthening US dollar all exert further downward pressure. Industrial and agricultural commodity prices have been on a downward trend for three years and are expected to decline further throughout 2015 before a modest turnaround in 2016.
“Energy, metals, and agricultural raw material indices have declined by about 25% each from early 2011 record highs to the end of 2014. This is a reflection of the fragile recovery of the global economy,” John Baffes, a World Bank senior economist, told Asia Focus recently from his office in Washington DC.
The decline has been broad-based, with agricultural commodity prices weakening 9% in the fourth quarter of last year, metals 8%, and precious metals 9%, according to the World Bank. Precious metal prices are expected to fall 3% this year on top of the 12% decline last year. A 4% decline is seen in food commodity prices after a fall of 20% since 2011.
Mr Baffes attributes the trend to lower oil prices, which means low input prices, and weak demand growth.
The slide in oil was brought on by excess production, the sluggish recovery of major economies, and the decision by the Organization of Petroleum Exporting Countries (Opec) to abandon supply management and focus instead on maintaining market share. Crude oil prices fell 55%, the most among all commodity sectors, from $115 a barrel last June to $47 in January, though they have revived to sit above $50 recently.
For industrial and agricultural commodities, emerging economies in Asia including China and India are the key drivers for demand growth for infrastructure development, but European demand remains weak.
Given the well-supplied nature of the commodity markets, it could take two years before prices bounce back along with a recovery in the global economy, said Mr Baffes.
PALM OIL REVIVAL
Closer to home, two commodities that play a big role in Southeast Asian economies — palm oil and rubber — have followed the global trend, although palm oil prices have rallied lately. For rubber, sustained improvement will require new approaches.
Floods in Malaysia, Indonesia and Thailand at the end of last year have curbed output. The three countries are the world’s top producers and exporters of palm oil and natural rubber, controlling more than two-thirds of global supplies.
With many major oil palm plantations still under water and feared damaged, the expected shortfall has sent prices rallying by 10% in the past three weeks to a sixmonth high. Natural rubber prices are up 5.7% in the same period, The Wall Street Journal reported.
Despite the recent increases, prices for both commodities are still low. Rubber fell 30% last year because of a supply surplus, while palm oil sank more than 20%, it noted.
John Clendon, managing director SETlisted Univanich Palm Oil Plc (UVAN), said the weakness in the palm oil price was not unexpected.
“Palm oil prices will remain weak this year, but it is not an alarming trend in the long term,” he said. “Commodities businesses are in cycles and we are accustomed to this so we manage our business with this in mind.”
Palm oil and petroleum prices are linked, he says, because a lot of palm oil is used for biofuel: when petroleum goes down, palm oil prices tend to follow suit.
The current mini-rally stoked by low supplies has forced authorities to act to ensure that enough palm oil will be available for food production and consumer use. In Thailand, 25% of palm oil goes into biodiesel, so the government has reduced the biodiesel blend from 7% to 3.5% to weaken domestic demand.
The seasonal shortage forced the government to act because if it did nothing, “we would find a situation where there was no cooking oil on the shelf in the supermarket”, said Mr Clendon.
The government also moved to import 50,000 tonnes of crude palm oil to ensure supplies for consumers, but that led to protests by farmers who have been enjoying the price revival.
“Although the palm oil price in Thailand is 10 baht per kilogramme higher than the world price, no one has really been benefiting from it because there is no fruit, no production,” said Mr Clendon. “Even though you can sell at a higher price, you won’t make any profit because the cost is much higher.”
The recent imports of palm oil haven’t had a significant impact on prices yet as the amount is small compared to total consumption.
Mr Clendon believes the government should have acted sooner despite claims that some producers may have been manipulating stocks to push prices up. “In our case, we have no stock at all because the production has been too low.”
Globally, the demand for palm oil is still quite good and he is optimistic about market growth in Thailand as well as in big markets such as China and India.
“The long-term outlook for market growth is still quite bullish,” he said, “The European Union is the top consumer of palm oil at 6-7 million tonnes a year, and despite the economic crisis and slow demand in Europe, we expect there will be compensation from India and China.”
Domestic demand in Indonesia and Vietnam is also growing rapidly, he added.
Mr Clendon says three factors driving vegetable oil demand in the long term are population growth, higher individual consumption and the growing middle class.
“It is happening in a very dramatic way. This year, the price will not be strong but in the longer term, we are certainly optimistic because of the continuing demand. The world requires 4-5 million more tonnes of vegetable oil every year.”
In China and India, per capita consumption of edible oils over the last 20 years has more than tripled from 7 kilogrammes per year to about 25 kg today. “In developed economies such as the US or Europe, it is more than 40 kg per person so there is a long way to go,” he said.
LOOKING FOR A BOUNCE
Natural rubber prices have been following the downward trend of other commodities, but the trend could be reversed if proper plans are put in place, believes Chaiyos Sincharoenkul, president of the Thai Rubber Association (TRA) and executive director Sri Trang Agro-Industry Plc.
Rubber production for the past three years has outpaced consumption, resulting in high accumulated stocks. The World Bank reported that in the last quarter, the natural rubber price was down 35%.
Thailand is the world’s largest rubber exporter, exporting about 3 million tonnes last year, followed by Indonesia with 2 million, then by Vietnam. Mr Chaiyos said the protracted price decline was “unusual” and was hurting farmers and the overall economy of the region.
“Some farmers are returning their trucks and facing a tougher life but we have to cope with it,” said Pakpong Witantirawat, a rubber farmer in Trang province. “What we need is the value-added knowledge to transform natural rubber so we can sell at a higher price.”
Although the Thai government has tried to subsidise rubber prices to help farmers, this method is not sustainable and will help only about the 0.5% farmers who are members of cooperatives, said Mr Pakpong. The rest are smallholders.
“Longer-term and more sustainable plans should be put in place,” said Mr Chaiyos, “They should be carried out continuously from government to government rather than having the plan renewed every time the government changes.”
For a start, he says, the government could control plantation areas so that production is balanced with market demand. “We know that the production capacity in Thailand is 4 million tonnes per year so we could use this number to calculate a longterm plan.”
In some cases, he says, the government can encourage farmers to look for alternative crops to rubber. “Education is very important and the government should provide knowledge and resources for farmers.”
However, Mr Pakpong conceded that most farmers in southern Thailand are unlikely to switch to other crops or to palm oil as rubber is more profitable.
Mr Chaiyos said farmers could help themselves through more cooperative efforts on the supply side. “They should gather and discuss the amount of their yields rather than acting individually.”
He predicted that rubber prices would remain down this year as there seemed to be no factor to trigger a rebound.
“What we need is the value-added knowledge to transform natural rubber so we can sell at a higher price”
PAKPONG WITANTIRAWAT
Trang rubber farmer