Palm oil market hit by two ‘C’s: crude oil and coronavirus
G Chandrashekhar | Updated on January 30, 2020
A deadly combination of two ‘C’s has hit the palm oil market. A rapid decline in crude oil prices and the upheaval over the rapid spread of China-centred Wuhan Coronavirus has pummeled the palm oil market, bringing the bull run of the last three months to a premature end.
Crude palm oil (CPO) rates have seen a sharp correction of 10 per cent from their recent peak, which translates to roughly $70 a tonne. Hopes of a decisive return to over $700 a tonne are turning slim, as there are uncertainties relating to global crude oil market and Chinese purchases of palm oil in the months ahead.
Bull run
CPO market started its upward trajectory sometime in October because of a host of factors, including concerns of slower output growth, rise in Chinese demand, anticipated fall in inventory and ambitiously targeted biodiesel programme in Indonesia.
From around $560/t, equivalent to roughly Malaysian ringgit 2,300/t, the market spurted to about $750/t or RM 3,000/t. The price rise was accelerated by a huge inflow of speculative capital. There was an expectation that the market would begin to correct from April 2020 onwards (See BL Commentary ‘Palm oil rally to peter out by end-Q1 2020’).
As is well-known, following the re-emergence of demand concerns, Brent crude market saw a sharp correction from around $ 64 a barrel to hit $ 58.5 a barrel earlier this week. While the market is limping back, developments in China are being closely watched.
China factor
The Asian major is the world’s largest importer of crude oil. Following the outbreak of coronavirus, public life is coming to a halt in many cities and transport movement is slowing in many parts of China. As a result, crude oil demand could face a dent. As of now, it is unclear how soon the epidemic will be contained.
The vegetable oil market, including the palm oil market, is impacted by the crude oil market through the biodiesel route. While Brent crude has dragged CPO down, the signing of the Phase One agreement between the US and China has boosted soybean prospects. China is expected to buy increasing quantities of US-origin soybean while reducing the purchase of palm oil.
India has also imposed licensing restrictions on import of refined palm oil. Suddenly, for palm oil, the demand side is looking weak. Of course, brave statements continue to emanate from Malaysia that the country will explore other markets if India does not purchase from them. These statements are intended to arrest the sagging morale of producers.
Dim prospects
The big question is whether the CPO market will recover from the current levels. While there is the clear possibility of a small uptick in prices in the coming weeks, to wrest the RM 3,000/t mark is a tough task. Even if it is done, on current reckoning, it appears highly unlikely that CPO rates will stay decisively at or above RM 3,000/t for a length of time.
In other words, the palm oil price rally has come to an end well before the anticipated time (April 2020). Meanwhile, Indonesian biodiesel programme that started this January needs a close watch for signs of its success or otherwise. Watch this space.
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