China’s Reviving Economy and The Demand of The Palm Oil

China has managed to arrest and contain the spread of the COVID-19 pandemic outbreak in a very effective manner. The is evident from reports by the Chinese authorities the shape of the pandemic and the small number of cases reported outside Hubei and is also a testimony to the success and the effectiveness of its China’s containment action. Chinese nationals abroad are returning to their homeland based on the justification that China has contained the virus successfully.

The impacts of COVID-19 in China are largely “short-term, external and controllable,” National Bureau of Statistics of China (NBS) spokesperson Mao Shengyong said at a press conference (March 16, 2020, Xinhua News Agency). China has been proclaiming that it had triumphed in containing the pandemic crisis and withstood the shocks economically. Mao noted that the power of the internet, the flexibility of the economic policy and their large-scaled economy are the foundation of their resilient factors in the success. Data produced by China also showed that China’s job market remained generally stable in February, with the surveyed unemployment rate in urban areas at 6.2%, up to one percentage point from the previous month, though it is set to improve as enterprises restore production order (March 16, The Star)

This may seem like a piece of good news to China, as their success in pandemic containment will increase the confidence in the country’s economy and Xi’s government. Beijing also says that more than 90% of industrial companies in most provinces were up and running as of March 17, according to the National Development and Reform Commission. Subsequently, this will result in the restoration of the country to its normal state and will improve the domestic consumption of the country, back on the accelerating track.

How well China will regain its economic strength is a question remained to be answered, until the pandemic situation can be contained globally rather than in China alone. This is because China is an export-based economy. It’s the largest exporter in the world, worth almost 2.3 trillion in 2019, equivalent to 18.5% of its total GDP based on CIA the world factbook figures. Demand for China’s production materials will only increase if North America, Europe, Japan, and other wealthy nations get back on their economic trajectories.

Impact on the Palm Oil Demand

Palm oil is considered one of the negatively impacted commodity sectors when one of the major buyers, China, had reduced its palm oil and palm oil products imports. The COVID-19 crisis has been one of the major reason crude palm oil price fell to RM2,330 per tonne on 23rd March, compared to its early January value from RM3,134 per tonne (March 25, 2020, The Edge Market)

Weekly Average Wholesale Price Trend of Edible Oils for the Month March 2020

Price US$/MT

Date Palm Olein +/- compared to previous week  Rapeseed oil +/- compared to previous week Soyabean oil +/- compared to previous week
06/03/20 744.00  -32.88  1229.93  -7.79  840.96  -31.68 
13/03/20 708.52  -35.47  1174.17  -55.76  790.73  -50.23 
20/03/20 685.51  -23.01  1112.51  -61.66  769.56  -21.17 
27/03/20 756.72  +71.21  1197.95  +85.44  844.63  +75.07 

Average exchange rate: USD1 = RMB7.076

The lower prices and the disparity between the palm oil and soft oils (refer to the table above) will trigger buying interest for palm, for the food and nonfood sector. It is expected until the COVID-19 pandemic is fully subsided demand for packed food and ready to eat food will increase and the manufacturing of health and personal care products especially from the oleochemical sector will lend support to palm oil. A research conducted by JD.com confirms that the 2nd largest e-commerce platform in China recorded tripled instant noodle sales in the first 10 days of the 2020 Lunar New Year compared with the same period in 2019.

Also, Palm Oil Analytics Dr. Sathia Varqa highlighted that the essentials like edible oils, personal and home care hygiene products will project a sharp increase in March’s domestic consumption due to the panic buying trend of the consumers due to uncertainty. He said, “We expect the domestic consumption to do well again in March after it increased by 16.29 percent month-on-month in February,” reported Bloomberg.

Unfortunately, the supply condition isn’t favoring the real situation. Several oil palm estates and mills in Sabah, have confirmed COVID-19 cases and casualties. This has triggered a lockdown in the plantation sector within the state. Sabah is Malaysia’s largest palm oil-producing state, and accounted for 25% of 2019 production volume. The temporary suspension of the upstream operation in the state is expected to cause production disruption, thus, inevitably causing a tight supply scenario in the market.  “The closure of palm oil estate and milling operations in six districts in Sabah could result in a loss of 18% to 20% in Malaysia’s monthly crude palm oil (CPO) production, and a 2% loss of total CPO production for 2020.” (The Edge, March 31, 2020).

Will the price factor make China focus on an alternative to palm oil?

Favorably, shortfall of palm oil production is not as significant as other oilseed production globally. The production for other competitive products to palm oil, namely rapeseed and soybean has fallen more than palm oil. World production of soybeans is forecasted at 338.6 Mn. MT, down 21.3 Mn. MT from a year earlier. Meanwhile, the estimated world rapeseed & canola output also reduced to 60.92 Mn. MT from 64.51 Mn. MT in July/June 2018/19, the lowest in 8 years (March 27, 2020, Oilworld). Given the fact that the output of these 2 major oilseeds dropped approximately 6%, it will translate into lower availability of soybean oil and rapeseed oil output, questioning the fact whether it will be able to be the alternate to palm oil. Additionally, the price of palm oil is still attractive compared to other alternative edible oil alternatives to China.

Additionally, the Indonesian President’s statement on 31st March, confirming that he will not lock down the country,  will boost the sentiment that the supply of the palm oil products will remain enough to be exported. Therefore, sufficient supply and slowing demand will be the key factors for palm oil to remain as the most consumed edible oil in the world for now.

Prepared by:  Theventharan Batumalai 

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