Market expects production recovery H2 2020
Government intervention to affect demand
Singapore — Asian palm oil prices are likely to stay firm heading toward 2021 on supply concerns and potentially rising demand due to COVID-19 vaccine developments while competing vegetable oils provide further support.
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Register NowA recovery in palm prices from May onward as India and China emerged from COVID-19 lockdowns is expected to extend into the first half of 2021. The sentiment is further buoyed by forecasts of lower production in first quarter 2021, and by the Indonesian government's announcement that the B30 biodiesel mandate would be upheld.
High prices of competing vegetable oils could also support palm oil. Soybean oil prices have rallied due to weather concerns in South America, and near-term prices have been buoyed by a labor strike in Argentina. Sunflower oil prices have strengthened on supply tightness in the Black Sea, where production during the October 2019 to September 2020 period decreased by 2 million-3 million mt due to dry conditions causing poor harvests and low oil content in seeds.
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Prospects of a recovering palm oil production in the second half of 2021 and uncertainty around a new strain of the coronavirus could cap the upside. Market participants also expect increased volatility and uncertainty because of government levies and duties, as well as the prevalence of speculative actors in the market.
"Vegetable oil prices are touching the higher range with mostly bullish factors priced in. However, with production expected to be stronger in 2021, further recovery in vegetable oil needs relatively strong demand to counteract higher production. Government policies will be key in 2021 as vegoil prices will render inflation an issue. It will also be difficult for the Indonesian government to subsidize the biodiesel mandate, with the 2021 allocation announced at 9.2 million KL [kiloliter], due to the unfavorable spread of palm oil over gasoil," said Anilkumar Bagani, research head at Mumbai-based consultancy Sunvin Research.
The PO-GO spread, or the relationship between feedstock palm oil and gasoil the biodiesel industry uses to gauge costs and margins, was at $443.24/mt as of Dec. 24. A PO-GO of minus $150/mt or more is usually considered favorable for discretionary blending.
There is nascent optimism about COVID-19 vaccines on the market, which could be tempered by the emergence of a new strain in the UK. As a result, while India and China are not expected to institute lockdowns, any change in this policy will affect palm oil prices.
"One of the main factors affecting the palm market in 2021 will be COVID-19 and its mutations, as this affects both food and festival demand," said a trader.
Demand shift as lockdowns ease
India's edible oil imports for 2019-20 were at 13.46 million mt, with 2020-21 imports expected to rise to 15 million mt, of which palm oil imports are forecast to rise to 9.3 million mt from 7.25 million mt in 2019-20, according to Nagaraj Meda of TransGraph Consulting. Sunflower and soybean oil imports are likely to reduce slightly.
"This will be due to a demand shift from household cooking to the hotels, restaurants and catering segment. Household consumption of edible oils in India in 2020 is at 15.1 million mt, up from 11.8 million mt in 2019, and is likely to fall to 13.4 million mt in 2021," Meda said, adding that palm oil demand from the hotels and eateries sector combined could rise to 6.7 million mt in 2021 from 3.5 million mt in 2020.
Meda noted that the current assumptions of an upside potential in demand would be at risk until the effects of the vaccine on the new strain are clear. "If the new strain causes more complications than initially thought, this could result in a selloff of the futures."
Government action
While COVID-19 wrought destruction on crude oil prices, vegetable oil prices proved resilient, rising to the point where food inflation concerns became an issue. The Indian government reduced the import duty on crude palm oil, or CPO, by 10% to 27.5% at the end of November in a bid to temper high local prices, while the import duty on competing vegetable oils sunflower oil and soybean oil remain at 35%. Market participants expect imports of palm oil to increase by around 100,000 mt a month, at the expense of soybean and sunflower oil imports.
A progressive export levy structure introduced by the Indonesian government has also added to market uncertainty and volatility, with sellers and buyers at a standstill until the new levy for the month, if any, is announced.
Production increase in 2021
Palm oil production in 2021 is forecast to increase from 2020 levels, mainly due to good rainfall during April-August 2020 as well as enhanced fertilizer usage and better estate management practices, though production growth year on year is expected to be weaker.
Malaysian CPO production in 2020 could range from 19.1 million to 19.3 million mt, with production in 2021 up at 20 million mt, according to market sources.
"I still expect Q1 production to be weak, but the tight fundamentals will unbuckle in April or May when higher production comes in. The 2020 rains resulted in better subsoil moisture. Higher prices in 2019 also allowed for more fertilizer and pesticide to be used, and all these factors have given rise to a more conducive growing environment," said a producer, who added that labor issues in Malaysiacould be negated if the COVID-19 related restrictions ease.
For Indonesia, market participants expect production in 2021 to range from 47.5 million mt to 48 million mt, up from an expected 2020 production of 44 million mt to 44.5 million mt.
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December 31, 2020 at 11:00PM
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Commodities 2021: Tight production, demand expectations to support Asian palm oil prices - S&P Global
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