Demand for oleochemicals will be key driver to support palm oil prices

Oleochemicals are mainly derived from animal fats and greases like tallow or vegetable oils and fats like palm and coconut oil, fatty acids are mainly used in cosmetics and toiletries, as well as for the production of lubricants and plasticizers in rubber and polymer processing. The current Covid 19 pandemic will likely see demand for oleochemicals spike and global oleochemicals markets are bracing for potential shocks to the supply chain. This is due to higher demand for production of cleaning products and disinfectants or sanitizers. In addition to this, food and beverage demand will see surges in the continued spread of the coronavirus (Covid-19) pandemic.

Glycerine is mainly used in personal and oral care products such as skincare creams, toothpastes and mouthwashes, as well as food products either as glycerine directly or one of its derivatives such as glycerol mono-stearate. Mid-cut alcohols are mainly used to produce surfactants. This class of chemical products comprise numerous cleaning and detergent uses, ranging from household agents to oilfield applications.

When Malaysian Prime Minister Muhyiddin Yassin announced the Restricted Movement Order (RMO) on 16 March following a spike in coronavirus cases in the country, there were confusion among a number of Malaysian oleochemical producers who declared force majeure on 20 March after the RMO – announced to contain the spread of the virus – mandates a full-on lockdown of the country apart from essential activity from 18 to 31 March, including border closures. Several Malaysian oleochemical producers subsequently declared force majeure amid uncertainty on whether they were allowed to operate during the lockdown, despite both upstream and downstream sectors being included on the exemptions list.

Producers across the oil palm industry were initially thought to be included in the lockdown, prompting the Malaysian Palm Oil Association to request for the expansion of the exemption list to include palm plantations. Palm producers were granted exemptions as of the afternoon of 18 March. Oleochemicals producers in the meantime continued to press on, unclear on whether the exemptions included the suppliers of the raw materials that go into these products.

In a bid to calm the situation and to clarify matters following the announcement, the government approved the exemptions of several essential industries, allowing them to operate at a baseline capacity during the lockdown. The initial exemption included manufacturers of disinfectants, sanitizers and detergents.

As Malaysia is one of the world’s largest producer of palm and oleochemicals, the industry felt the first impact of the virus during the early stages of the outbreak earlier in the quarter, as reduced demand from China put severe downward pressure on feedstock palm oil costs and squeezed production margins. China is one of the largest consumers of palm oil and the largest consumer of oleochemicals in the world. Coupled with unfavourable prices, a second major impact came after Saudi Arabia and Russia launched a crude oil price war against the backdrop of the continued spread of the virus outside China in key markets like western Europe and the US.

The now low crude oil price has seen a decrease in the demand for diesel in fuels as governments impose heightened restrictions on transit. Furthermore, the low crude oil prices is putting increased pressure on Indonesia and Malaysia to fulfill the B30 and B20 mandates, raising concerns about crude glycerine production in the region and refined glycerine supply across the globe as demand for oleochemicals surges with the continued spread of the virus. Since glycerine is a by-product of biodiesel production, so lower biodiesel output would also lower that for crude glycerine. Biofuels production in Europe and North America is falling, while production in Argentina has come to a halt, adding to the concerns. Producers in Brazil – a major producer and exporter of crude glycerine – have also raised concerns that decreased diesel demand could lead to production cuts.

However, the demand from the pharmaceutical and sanitary care product manufacturers has seen an unprecedented demand for oleochemicals which has curtailed palm oil price from falling and seen price of palm oil strengthening over the past few days. Both the local CPO delivered price and BMD FCPO 3-month futures ended strong since 18 March 2020 when the RMO was enforced. 

  Local Price (RM/MT) Export Prices (US$/MT)
Date CPO CPKO RBD PO RBD PL RBD PS
18-Mar-20 2,301 NT NT 550 575
19-Mar-20 2,267 2,792 NT 551 563
20-Mar-20 2,314 2,894 553 NT NT
23-Mar-20 2,316 NT NT 558 NT
24-Mar-20 2,375 NT NT 564 578

Source : MPOB

  BMD BMD
  Settlement Price (RM/(USD) Volume Traded (lots)
18-Mar-20 RM2,239 ($512.50)  121,865 
19-Mar-20 RM2,216 ($502.50)  78,562
20-Mar-20 RM2,288 ($522.25)  79,938 
21-Mar-20 RM2,289 ($515.00)  65,436 
22-Mar-20 RM2,353 ($530.75)  63,305 
23-Mar-20 RM2,383 ($542.25)  59,365 

Source : BMD

The international oils and fats prices also strengthened due to the anticipated higher demand overall for oils and fats.

Product Price US$/ MT 18-Mar 19-Mar 20-Mar 23-Mar 24-Mar
SBO (fob, Dutch) 716.8 690 684 685 690 690
SBO (Brazil, fob) 585.6 573 586 598 609 616
SFO (fob, Argen) 664.0 645 645 645 N/A 650
RSO (fob, Dutch) 809.8 754 760 770 755 737
CPO (cif, Rott) 608.4 595 585 595 595 595
CPO (fob, Indon) 560.4 555 545 558 548 555
PKO (cif, Rott) 693.0 670 650 700 670 680
CNO (cif, Rott) 835.0 810 810 815 820 815

Source : Oil World

The global glycerine markets have already started to react, with prices in all three regions increasing as supply-chain uncertainty grows and demand for applications in the cleaning-sector booms with the continued spread of the virus. Having seen China which has apparently emerged from the worst of the outbreak, cases in Europe and the US continue to rise, sustaining demand in the market. One US producer said a buyer increased the volume from its contracts by 50% for Q2 amid the supply-chain concerns.

Fatty acids and fatty alcohols are the next markets to face major disruptions along the global oleochemicals supply chain, as supply and demand start to outstrip declining feedstock costs in the negotiations for volumes. Vessels shipping oleochemicals to both Europe and the US were already heard to be delayed amid constraints posed by the coronavirus. The supply of fatty alcohols to both Europe and the US is heard to be growing particularly tight, as both regions are dependent on southeastern Asia for their supply of natural alcohols, while the US also imports a significant amount of synthetic alcohols from Europe. In some instances, shipping and delivery costs have as much as doubled.

The addition of local supply constraints will only further challenge the situation as increased travel restrictions delay the transit of goods, especially in regions hard hit by the virus like southern Europe. As such, global oleochemicals markets are likely to face upward pressure in the face of increased shipping and logistics constraints as supply chain uncertainty grows alongside increased demand for goods to combat the spread of the coronavirus. In the meantime, market players are likely to closely watch developments in southeastern Asia and Europe, as disruptions in these markets typically trigger a trickle-down effect on markets in North and South America.

 * This article is based on a report by Ingredients Commodity Intelligence Services (ICIS), “Global oleo chems brace for shock amid uncertain supply chains” on 20 March 2020.”

Prepared by: Izham Hassan

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