The market expects production to resume in the second half of 2020
Government intervention to influence demand
Palm oil prices in Asia are expected to remain firm as 2021 approaches due to supply issues and potentially growing demand due to the development of the COVID-19 vaccine, while competing vegetable oils provide additional support.
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A recovery in palm prices from May, as India and China emerge from COVID-19 lockdowns, is expected to last through the first half of 2021. Sentiment is further supported by lower forecasts for production in the first quarter of 2021 and by the announcement of the Indonesian government. that the mandate of B30 biodiesel would be respected.
The high prices of competing vegetable oils could also support palm oil. Soybean oil prices rebounded amid weather concerns in South America, and near-term prices were supported by a labor strike in Argentina. Sunflower oil prices have strengthened due to the shortage of supply in the Black Sea, where production from October 2019 to September 2020 fell by 2-3 million tonnes due to dry conditions resulting in poor crops and a low oil content of the seeds.
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The prospects for a resumption of palm oil production in the second half of 2021 and the uncertainty around a new strain of the coronavirus could cap the increase. Market participants also expect increased volatility and uncertainty due to government levies and duties, as well as the predominance of speculative players in the market.
“Vegetable oil prices are in the upper range with predominantly bullish factors. However, with production expected to be stronger in 2021, the continued recovery of vegetable oil requires relatively strong demand to counter the rise. prices will make inflation a problem It will also be difficult for the Indonesian government to subsidize the biodiesel mandate, with the 2021 allocation announced at KL 9.2 million [kiloliter], due to the unfavorable dispersion of palm oil on diesel, ”said Anilkumar Bagani, research manager at Mumbai-based consulting firm Sunvin Research.
The PO-GO spread, or the relationship between palm oil and diesel fuel used by the biodiesel industry to estimate costs and margins, was $ 443.24 / tonne as of December 24. A PO-GO of less than $ 150 / tonne or more is generally considered favorable to discretionary blending.
There is emerging 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 should not 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 it affects both food demand and festival demand,” said one trader.
Changing demand as lockouts get easier
India’s edible oil imports for 2019-2020 were 13.46 million tonnes, 2020-2021 imports are expected to reach 15 million tonnes, of which palm oil imports are expected to rise to 9.3 million tonnes against 7.25 million tonnes in 2019-20, according to Nagaraj Meda of TransGraph Consulting. Imports of sunflower oil and soybeans are forecast to decline slightly.
This will be due to a shift in demand from home cooking to the hotel, restaurant and catering segment. Household consumption of edible oils in India in 2020 is 15.1 million tonnes, up from 11.8 million tonnes in 2019, and is expected to drop to 13.4 million tonnes in 2021, “Meda said, adding that the demand for palm oil from the combined hotel and restaurant sector could reach 6.7 million tonnes in 2021 compared to 3.5 million tonnes in 2020.
Meda noted that current assumptions of a potential for increased demand would be threatened until the effects of the vaccine on the new strain are clear. “If the new strain causes more complications than initially thought, it could lead to a sell off of the futures contracts.”
While COVID-19 destroyed crude oil prices, vegetable oil prices have proven to be resilient, rising to the point where food inflation fears have become a problem. The Indian government reduced the import tariff on crude palm oil, or CPO, from 10% to 27.5% at the end of November in an effort to temper high local prices, while the tariffs import on competing vegetable oils, sunflower oil and soybean oil remain at 35%. Market participants expect palm oil imports to increase by around 100,000 tonnes per month, at the expense of soybean and sunflower oil imports.
A phased structure of export levies introduced by the Indonesian government also added to market uncertainty and volatility, with sellers and buyers at a standstill until the new levy was announced for the month, if applicable.
Increase in production in 2021
Palm oil production in 2021 is expected to increase from 2020 levels, mainly due to good rainfall from April to August 2020, as well as increased use of fertilizers and better plantation management practices, although that the growth in production from year to year is expected to be lower.
Malaysian CPO production in 2020 could range from 19.1 million to 19.3 million tonnes, with 2021 production of 20 million tonnes, according to market sources.
“I still expect Q1 production to be weak, but tight fundamentals will unlock in April or May when production increases. The rains of 2020 resulted in better basement humidity. The price hike in 2019 also made it possible to use more fertilizers and pesticides, and all of these factors resulted in a more conducive growing environment, ”said one grower, who added that labor issues. work in Malaysiacould be rolled back if COVID-19 restrictions ease.
For Indonesia, market players expect production in 2021 to range from 47.5 million tonnes to 48 million tonnes, compared to a forecast production of 44 million tonnes to 44.5 million tonnes in 2020.