KUCHING: Lower palm oil export numbers will likely persist if the spread of the Covid-19 is not controlled, but analysts believe that demand is largely recession-proof.
AllianceDBS Research Sdn Bhd (AllianceDBS Research) believed that the Covid-19 pandemic has disrupted the palm oil supply chain globally as most affected countries have put travel and movement restrictions to curb the spread of the virus.
“Many countries are currently in lockdown mode and this is expected to affect the flow of goods in and out of the country.
“February has already shown a steep decline in export numbers from Malaysia and we expect a decline in export numbers as well in March,” the research firm observed in a report on a local plantation company.
“We also anticipate lower export numbers to persist if the spread of the virus is not controlled.”
However, AllianceDBS Research’s channel checks showed that despite its expectation of a month on month (m-o-m) fall in exports for March, stock levels are expected to fall further due to lower production of crude palm oil (CPO) in the month of March.
“The lower production yields can be attributed to trees going through its resting period after two years of supernormal yields and the haze and El-Nino which happened in late third quarter of financial year 2019 (3QFY19).
“Also, the suspension of upstream operations for major Sabah estates on March 25 and mill operations on March 27 for one week would further impede palm oil production.”
The Malaysian Palm Oil Association and Malaysian Estate Owners’ Association have called on the Sabah state authorities to allow plantations and mills with no Covid-19 cases in six districts to resume operations.
The Sarawak Oil Palm Plantation Owners Association also called on the government to reconsider the parameters for the Movement Control Order for isolated cases of mills or estates.
On demand, AllianceDBS Research believed that the current crisis is different from the last as palm oil demand is proven to be recession-proof from the global financial crisis.
“Palm oil is an essential food product and its projected short-term fall in demand is primarily attributable to the movement restrictions implemented by most nations, which we believe will be resolved soon due to the essentiality of palm oil usage for non-perishable food products including instant noodles and biscuits.”
Meanwhile, AllianceDBS Research observed that pick-up in non-perishable food demand is expected to mitigate lower demand from widening palm oil – gas oil (POGO) spreads.
The research firm recapped that since the failure of the Organization of the Petroleum Exporting Countries and allies (OPEC+) meeting, Brent crude oil has taken a huge plunge in its price, going to as low as US$22.74 per bbl in late March from its year to date (YTD) high of US$68.91 per bbl.
It noted that both Russia and Saudi Arabia are currently in a price war and both nations would have the capacity to pump more than three million barrels per day (bpd).
“This has caused the POGO spread to hit one of its highest ever level as crude palm oil (CPO) price has managed to sustain around the RM2,400 per metric tonne (MT) level in March while oil price plunged to a 20-year low.
“However, we believe that the elevated demand for packaged foods such as instant noodles would be able to mitigate the fall in demand from lower biodiesel usage.
“Instant noodles are made up of 20 per cent palm oil as manufacturers would have to flash-fry them in palm oil to evenly dry the strands.
“Hence, we believe that it is important for Malaysia and Indonesia to ensure that there is adequate supply of palm oil to the world due to the indispensability of palm oil in the manufacturing of packaged foods.”
Source : The Borneo Post