Palm oil skids on Covid-19

The month of February 2020 was punctuated by two disparate events which could have a telling effect on trading in palm oil. 

The first was the outbreak of coronavirus in Wuhan province of China. It has spread to close to 100 countries, afflicting every continent on earth except Antarctica. The fear of a global pandemic has roiled markets and kept businesses on tenterhooks. The other is the volatile political climate in Malaysia with change in equations amongst leading personalities.

The Indian economy is in a state of flux. The International Monetary Fund has reduced the growth outlook for FY20 to 4.80%. Moody’s revised its growth forecasts for India for 2020 to 5.4% and 5.8% for 2021. The previous projections were 6.6% for 2020 and 6.7% for 2021. A steep fall in projections mirrors the overall outlook of the economy.

Over the last two years, the Gross Domestic Product has not been encouraging. Though the GDP grew at a disappointing 4.5 per cent in Q3 2019, positive signs in indicators such as PMI data points towards the economy showing signs of coming to an even keel.

In a recent interaction with the Finance Ministers, public sector bank honchos were exhorted to be liberal in granting credit to the Micro and Small-Medium Enterprises. What is perturbing is that multiple rate cuts by the RBI have not been fully passed down to borrowers. This has resulted in non-food bank credit growth decelerating to 7% in December 2019, against 12.8% a year ago. This leading to large scale layoffs. The result is to unemployment at a four-decades high.

The Union Budget 2020 did not contain a significant stimulus to address the demand slump. As similar policies in other countries have shown, tax cuts are unlikely to translate into higher consumer and business spending when risk aversion is high.

At the start of the new calendar year, Palm Oil imports into India from Malaysia were affected on the government announcing a change in the open import policy to restrict refined palm oil imports. While crude palm oil could be freely imported, restrictions were placed on the refined variety. The new import policy was seen as an unofficial restriction on imports from Malaysia. Reacting to reports about India hitting back at Malaysia in the light of statements attributed to their then Prime Minister, Commerce and Industries Minister Piyush Goyal clarified with a written statement in Parliament: “At present, there is no proposal to impose a restriction on import of any item from Malaysia”. The Minister affirmed that crude palm oil was freely importable while refined palm oil had been put under the restricted category. But this restriction was applicable for imports from all countries and not only Malaysia.

The Pakistani Prime Minister, Imran Khan, on a state visit to Malaysia, offered to pick up excess palm oil that Malaysia could be holding on India pruning imports. In 2019, Pakistan bought 1.08 million tonnes of palm oil from Malaysia, while India bought 4.40 million tonnes. Pakistan does not have the market potential to absorb the additional 3.309 million tonnes at prevailing prices. 80% of Pakistan’s palm oil comes from Indonesia which has a huge price advantage over Malaysia. Pakistan is the third largest palm oil importer from Malaysia but it might not have the means and capacity to buy additional palm oil.

A probable way of circumventing the problem of reduced Malaysian palm oil imports into India was to export it to a willing third party in another country which could then re-route it to India. This would entail additional costs. Even if economical, it may not last for too long, as Indian importers would be wary of taking such re-routed cargo lest they face problems and bottlenecks at home.

India needs 25 million tonnes of edible oils to meet its domestic requirement at the current consumption level of 19 kg per person per year. Out of the total requirement, 10.50 million tonnes are produced domestically and the remaining 60 percent is met through imports.

The major challenges in domestic oilseed production is the high dependency on monsoons and lack of adequate irrigation facilities. To increase domestic production, a National Mission on Edible Oils (NMEO) is on the anvil for the next five years. Some of the measures that could be mooted are promotion of oilseed in rice fallow or potato areas. Through inter-cropping, oilseeds could be introduced. Cultivation of oilseeds in non-traditional habitats and focused approach to the low-productivity districts are some of the other ideas mooted.

On the international front, tropical production is a cause of concern as production is expected to be down by 10%. Month-end inventories in Malaysia are estimated to be 12% lower than normal. With the approaching holy month of Ramadhan, demand is expected to perk up in the Middle East and pockets of Africa. Supplies are expected to revive from the end of March 2020.

In the month of January, edible oil prices in India slipped by 10%. In the same period, crude palm oil prices in Malaysia and Indonesia plummeted by 18%.  Supply of palm oil has stuttered due to the coronavirus outbreak in China. This has suppressed prices of other oils as well after they had leaped by 30-40 per cent year-on-year in the Oct-Dec 2019 quarter.

After India, China is the largest buyer of palm oil. But, in the aftermath of the coronavirus, imports have been snapped, causing a fall in prices. The international spike in price of palm oil saw the domestic edible oil prices spike up to 40 per cent in the last calendar quarter of the year 2019.  Though there has been a sharp downward slide in prices in January 2020, domestic crude palm oil prices, at Rs 76,500 per tonne, were 42% higher year-on-year.

In the midst of the turmoil, the Indian government made a decision that took everyone by surprise. It allotted licenses to import 1.10 million tonnes of refined palm oil from Indonesia. This shocked the market as, just the previous month, the government had put restrictions on importing of refined oil into the country. The matter has been taken up with the government by the Solvent Extractors Association of India with a plea to desist from issuing fresh licenses. The government has also been asked to review the rationale on the about turn done on issuing of fresh licenses.

International crude palm oil prices slipped more than 20 per cent in January/February, primarily due to the restrictions placed by India and the international scare of coronavirus. In just a one-week period, crude palm oil prices in Malaysia and Indonesia crashed by 10 per cent as supply to China stalled.

What the future holds for us in terms of palm oil would hinge on how fast the corona virus spread is halted and an antidote fount for it. Only then can the old-world business order be restored. Let us hope and pray it happens sooner rather than later.

Prepared by: Bhavna Shah

*Disclaimer: This document has been prepared based on information from sources believed to be reliable but we do not make any representations as to its accuracy. This document is for information only and opinion expressed may be subject to change without notice and we will not accept any responsibility and shall not be held responsible for any loss or damage arising from or in respect of any use or misuse or reliance on the contents. We reserve our right to delete or edit any information on this site at any time at our absolute discretion without giving any prior notice.

You can share this posts:

Related Articles