Palm oil prices will remain low the next several months

The rapid spread of Covid-19 and the collapse of the crude oil market have combined to crush palm oil prospects in recent weeks, and the portends for the months ahead are ominous.

Palm market has had a number of support factors in its favour including Indonesia’s high biodiesel mandate (B30) and weak overall palm oil output growth. While Malaysia faces de-growth, Indonesia’s output this year will expand marginally. Yet, ironically, none of the support factors have come to palm’s rescue.

Covid-19 for one has exerted a disastrous effect on the palm oil market, pulling prices down precipitously. There is palpable demand destruction. Slowing global trade has meant palm oil exports are well below the levels anticipated at the beginning of the year.

In particular, palm oil imports into two of the world’s largest consuming markets — China and India — have reduced considerably. With the adverse impact of African swine fever waning, China has reduced its palm oil purchases. Inflows into India have also reduced sharply, especially the refined variety, on which import restrictions have been placed.

A significant factor that has pummeled palm oil is the collapse in crude oil prices. Brent is currently below $30 a barrel, a level unthinkable at the beginning of this year. A falling energy market has pulled the palm oil market down via the biodiesel route.

There is little incentive for discretionary blending, while mandatory blending will come at an enormous cost at the current price levels. The success of blending programmes is in doubt. Apprehensions about the Indonesian government’s ability to continue to enforce the B30 mandate are coming to the fore.

With the global meltdown of equity and commodity markets combined with demand constriction, there is little cheer left in the market. The sentiment is decidedly weak. If anything, the future is uncertain. If Covid-19 comes under reasonable control by May, there would arise the possibility of markets rebounding in the months ahead, especially given the ultra-loose monetary policies of many central bankers and stimulus packages offered by governments.

However, if the pandemic does not come under control, the world faces the risk of recession in the second half of the year, which will put downward pressure on all major commodities. Palm oil will not be an exception.

So, after the rally in the last quarter of 2019, the sharp decline in crude palm oil prices to around $550 a tonne (less than Ringgit 2,300/t) as a response to the slump in crude oil and weaker biodiesel demand is unlikely to change any time soon.

The attempts by the new Malaysian government to talk the market up by announcing that the friction with India will be resolved failed to cheer the market participants, who know only too well that it is not going to be easy.

Similarly, the energy markets covering crude oil are expected to remain under pressure until the demand-supply fundamentals improve. This will continue to weigh heavily on the vegetable oil market in general and palm market in particular.

While crude oil prices are unlikely to remain at the current low levels (Brent around $30 a barrel) for long, it is equally unlikely that they will reach their earlier levels of above $60 a barrel. On current reckoning, Brent has the potential to move up towards the $40 levels, but such a move will be of little help for palm oil given the demand concerns.

(The writer is a policy commentator and commodities market specialist. Views are personal)