Positive Outlook Remains for Palm Oil in China Despite the Recovery of Swine Sector

Review of China’s economy in 2021

China’s unrelenting efforts to tackle COVID have resulted in a significant increase in the country’s GDP growth for 2021. Although the COVID pandemic are still posing threats, economic activities has picked up after the country exited from a full lockdown since the start of the pandemic in 2019 . According to the IMF, China’s GDP would grow by 8.1 percent in 2021, which is 5.8 percent more than the country’s 2.3% growth registered in 2020. With the recovery, the population’s everyday activities are less disrupted. The improvement in the market situation has resulted in an increase in the country’s economic activity, primarily in the industrial and service sectors. The recovery has benefited many economic sectors including those sectors who uses palm oil.

Strong Recovery of China’s Palm Oil Import in First Half of 2021

For the first half of 2021, China manufacturers uses more edible oils to meet the country’s growing consumers’ demand as COVID 19 situation improves. Due to the rise in the use of edible oil and lower consumption base in 1H2020, China’s General Administration of Customs reported that the country’s palm oil imports rose by 13.8% or 358,830 MT to 2.96 million MT, rapeseed oil imports increased by 77.0% or 651,956 MT to 1.50 million MT, while soybean oil imports rose by 95.8% or 324,110 MT to 662,305 MT for the first half of 2021 compared to the same period last year. 

The import of palm oil could have been higher if not because of the unexpected tightness in the palm oil supplies in both Malaysia and Indonesia during the same period, which was reflected in the significant rise in palm oil prices, with average of the RBD palm olein prices in Dalian from January – June 2020 exchange rising by 40.6% to RMB7,270.70 per MT from RMB4,960.70 per MT for the same period last year.

Source: Dalian Commodity Exchange

Nevertheless, the decline in sunflower seed output in Russia and Ukraine, as well as tightness in global rapeseed supplies due to low carryover stock from 2019 has supported the needs for China to import palm oil to supplement the supply-demand gap created.

Malaysia’s palm oil exports for first half 2021

The period from January-June 2021 posed quite a challenge to the Malaysian palm oil industry exports to China. Malaysia’s palm oil exports is primarily affected by strong competition from Indonesian suppliers due to the rise in Indonesia’s export levy and taxes imposed on CPO export. For the month of June 2021 itself, Indonesia’s export levy and export taxes for CPO of USD 255/MT and USD 183/MT is higher than the same period in June 2020 of USD 50/MT and zero export duty. The hike in the export tax and levy increases Indonesia’s price competitiveness in refined palm oils & downstream products as compared to Malaysia.

As China imports mainly refined palm oil products, rising competition from Indonesia’s suppliers resulted in the decline in Malaysia’s export during the period. For the first 6 month of 2021, China’s Administration of Custom’s reported that import of Malaysian palm oil in China decreased by 663,816 MT or by 50.7% to 644,808 MT from 1.31 million MT recorded in the first half of 2020.  Meanwhile, Indonesia’s palm oil exports increased by 80.3% or 1.03 million MT to 2.31 million MT. Total palm oil imports by China during the period was 13.8% or 358,830 MT higher at 2.96 million MT.

Table 1: Palm Oil Import by Country of Origin in Jan-June 2021 (MT)

  Jan-Jun
2021
Jan-Jun
2020
Changes
(Vol.)
Changes
(%)
Jan-Dec
2020
Malaysia 644,808 1,308,625 -663,816 -50.7% 2,698,800
Indonesia 2,310,628 1,281,499 1,029,129 80.3% 3,746,700
Other 6,486 12,968 -6,482 -50.0% 16,000
Total 2,961,922 2,603,092 358,830 13.8% 6,461,500

Source: Chinese General Administration of Customs

As for palm products imported by China, RBD Palm Olein and RBD Palm Stearin are the major types of palm oil imported by China accounting for 99.2% of the total imports. This share is 0.5% higher than the record for the same period in the previous year of 98.7%.  There was a decrease in CPO import by 99.3% or 15,659 MT to 10 MT. In line with the higher amount of palm oil imported, China’s imports of RBD PL and RBD PS recorded an increase by 16.6% and 9.29% to 2.08 million MT and 861,605 MT respectively.

Table 2: Palm Products Imported by China in Jan-June 2021 (MT)

  Jan-June 2021 Jan-June 2020 Changes (Vol.) Changes (%) Jan-Dec 2020
RBD PL 2,077,032 1,781,525 295,506 16.6% 4,606,800
RBD PS 861,605 788,398 73,207 9.3% 1,805,500
CPO 10 15,669 -15,659 -99.9% 15,700
Others 23,275 17,499 5,776 33.0% 33,500
Total 2,961,922 2,603,092 358,830 13.8% 6,461,500

Source: Chinese General Administration of Customs

China’s palm oil import and Malaysia’s Palm Oil Export for second half and the entire 2021

Similar to first half 2021, palm oil imports and market in China in the second half of 2021 are likely to be affected by the same macro changes happening in the country’s domestic oils and fats market. The major macro features influencing the country’s palm oil market are the continuous recovery of the country from the COVID epidemic, the tight supplies of other major vegetable oils, as well as the need to replenish the low palm oil inventory, where all these are expected to continue supporting the needs to import palm oil.

Source: MPOC Shanghai Office

The country’s major edible oil stocks has been continuously registering lower volume early of the year as compared to the same period last year. While soybean oil and rapeseed oil witnessed stable increase subsequently in 2Q2021, palm oil stock continued its declining trend significantly as compared to the same period last year, and has broken the 400,000 MT level in June 2021 which was not seen in past 4 years.  Hence, there will be a need for importers and traders to replenish the stock in coming months, and will lead to stable or higher import of palm oil in second half of 2021.

Besides that, the skyrocketing feed ingredients’ prices which has led to negative margin for swine sector may put a stop on the over-optimistic strong growth of animal feed demand, and subsequently demand for soybean meal (SBM).  This will lead to the slowdown in soybean crushing and hence, the slower growth of soybean oil output in China. The Technical Blueprint to replace corn and SBM in feeds announced by Ministry of Agriculture and Rural Affairs on 20 April 2021, is expected to be implemented where some replacement will be seen as this is top-down initiative. This will further limit demand for SBM, and impact the growth of crushing activities, subsequently the SBO output.

Finally, with the drop or stagnating demand of both sunflower oil and rapeseed oil demand due to supplies tightness, where this will be supplemented mainly by SBO, impact of the increase in SBO output on PO may not be as significant in 2H2021.  Coupled with the summer months from July to mid-September were RBD PL demand is traditionally high in most parts of China, the demand of PO and its import volume will remain higher than 1H2021.

Nevertheless, the demand in 2nd half of 2021 may not be as strong as 2020 as the large price discount of RBD PL against SBO has slowly diminished lately due to the rising SBO stock while PO stock charted record low level. As of July 2021, the average monthly discount of RBD PL against SBO was recorded at RMB370/MT, sharp drop from RMB695/MT recorded in June. The drop will discourage the importers to book PO (especially RBD PL) cargoes, unless the discount widen again in later part of the year.  Fortunately, the drop in PO stock in China has also supported the local PO price and this has led to the better import margin of PO in June and July. 

Source: China National Grain and Oil Information Centre

All in all, based on the above market development, it is forecasted that the import of palm oil in 2H2021 will be slightly lower than the volume recorded last year, estimated at 3.76 million MT (against 3.86 million in 2H2020). With China having already imported 2.96 million MT of palm oil in the first half of 2021, China is forecasted to import 6.72 million MT for the entire 2021, 4% or 260,000 MT higher than 2020.

China’s higher palm oil imports expected for 2021 is likely to benefit the Indonesian suppliers only due to the country’s high export duty and levy which makes the country’s PO more competitive. Malaysia’s palm oil export is anticipated to be negatively affected by rising Indonesia’s competition and also another drop of CPO output forecasted. It is anticipated that the coming month’s imports from June 2021 onwards, Malaysia’s export will be lower than the same period in the preceding year.

Conclusion

The analysis above predicted that the favourable impact of China’s COVID recovery amidst a tight edible oil availability is favouring edible oil imports for the country in the first half of 2021. Major edible oil players such as palm oil, soybean oil and rapeseed oil importers are increasing their imports during the period.  With further recovery in COVID 19 situation and increasing need to import more palm oil to stock up in anticipation of improving demand especially from the HORECA sector, it is anticipated that the macro factors supporting palm oil demand in the second half of 2021 will continue to be strong. For the whole of 2021, our analysis projected that China will import 6.72 million MT which is 260,000 MT or 4% higher than 2020 imports of 6.46 MT.  Palm olein will be the main beneficiary in this rise in total PO import as the needs of supplementing the soft oils is and will be the main reason supporting the higher PO demand, instead of the non-food applications which uses mainly RBD Palm Stearin.  It is expected that Indonesian palm oil will benefit from the increase in China’s palm oil imports due to its price competitiveness arising from the high export tax and levy structure.

Prepared by Lim Teck Chaii  & Desmond Ng

*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.

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