PALM OIL MARKET OUTLOOK UPDATE - March 2022 Kian Pang, Tan - Bursa Malaysia
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PALM OIL MARKET OUTLOOK UPDATE March 2022 Kian Pang, Tan Lead Analyst, Agriculture Research kian.tan@lseg.com +65-69299353 Suet Yiing, Lim Senior Analyst, Oil Research suet.lim@lseg.com +65-86530214 An LSEG Business
2 Palm Oil Market Outlook Update: Russia-Ukraine conflict stoked global vegetable oil shortage fears, fuelling bullish palm prices • Production Outlook 2021/22 Indonesia palm oil production expected steady at 48.4 million tons amid a modest rainfall pattern, unchanged from last update in February. A slowdown in rainfall was observed in key palm areas across most parts of the Kalimantan region and the southern part of Sumatra while wet weather conditions prevailed elsewhere. Generally, the recent weather was mostly neutral for palms. Unresolved labour shortages and localized flash flooding further reduce 2021/22 Malaysia palm oil production to 18.6 million tons, down
3
Weather conditions during February featured a mixed rainfall pattern across palm areas. A slowdown in rainfall was
observed across most parts of the Kalimantan region, individual areas in the northern and the southern parts of Sumatra,
favourable for harvest activities. In contrast, wet weather conditions prevailed across the northern part of Sumatra, the eastern
part of Kalimantan, Sulawesi, Peninsular Malaysia and East Malaysia. The inter-monsoon/rainy period continued to bring high
rainfall during February, notably in the east coast of Peninsular Malaysia and Sabah, prompting localized flooding that threatened
output.
Localized flooding remains a concern in the near to mid-term. The short-term forward weather suggests that the high rainfall
pattern will likely persist in the coming 10 days across the northern and southern parts of Sumatra, the eastern part of the
Kalimantan region, Peninsular Malaysia and East Malaysia (Sabah and Sarawak) (Figure 2). Flooding will be a concern if
persistent high rains are verified across these areas, disrupting output. Also, the long-term seasonal rainfall forecast for March-
May (Figure 3) shows that above-normal rainfall is in store across most areas, except the southern part of Sumatra, the western
and central parts of the Kalimantan region and Sarawak.
Figure 2: Anomalously wet weather expansion across the northern and central parts of Sumatra, the eastern part of the Kalimantan
region, Peninsular Malaysia and East Malaysia over the next 10 days, according to the recent EC Op 00Z, updated on 7 March.
(Source: Refinitiv Weather Research)
Figure 3: Composite precipitation anomalies (mm) from the top March-May analogs based on the leading ENSO forecast
indicators. (Source: Refinitiv Weather Research)
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• Demand Outlook
Indonesia palm oil export for January 2022 expected to fall by 7.2% month-on-month, according to cargo surveyor data.
Shipments will likely remain slow due to the new Indonesian export regulation, Domestic Market Obligation (DMO), which
mandated producers to sell 20% of their planned exports to the domestic market. Under the regulation, all palm oil exporters have
to obtain a permit for shipment of palm products from 24 January. Any delays in obtaining permits will disrupt delivery, tightening
Indonesia palm oil supplies to the international market.
Malaysia palm oil exports for January 2022 declined by 18.7% month-on-month to 1.2 million tons, the lowest in 11 months,
according to the MPOB. However, palm oil shipments rebounded strongly in February, expected up by 11% compared to January,
cargo surveyor data showed. Malaysian palm oil exports rise partly due to the low base in January and at the expense of Indonesia,
whose outflows have been by DMO.
2021/22 world palm oil imports are reduced to 48.1 million tons (Table 2), down 3.2% from last month’s forecast.
Persistently high palm oil prices, narrowing price spread to soft oils and poor import margins have essentially lowered demand for
from key importing countries.
Country 2020/21 E 2021/22 E
Imports Imports
(million tons) (million tons)
India 8.4 7.8
EU-27 6.2 6.2
China 6.8 6.7
Others 26.2 27.4
World 47.6 48.1
E
Table 2: Palm oil imports from key destinations, Estimates as of March 2022 (Sources: USDA, Refinitiv)
2021/22 India palm oil imports are estimated at 7.8 million tons, down 8.2% from last month’s forecast and edge lower by
7.1% from the prior season’s 8.4 million tons (Table 2), weigh down by higher domestic oil production and palm’s narrowing
discounts to other soft oils, which favour sunflower seed oil and soybean oil imports. However, the Ukraine-Russia conflict has
disrupted delivery to India, including a shipment of 380,000 tons of sunflower seed oil, with more expected. India will likely increase
soybean oil and palm oil purchases to offset the sunflower seed oil shortfall.
India palm oil imports for January 2022 were at 0.55 million tons (Figure 4), down 2.3% from December last year, the Solvent
Extractors’ Association of India’s data showed. India’s palm stocks were at 0.40 million tons (Figure 5) for January 2022, up 15.6%
from December’s 0.34 million tons. Palm oil typically accounts for around 60% of India's total vegetable oil imports but has fallen
to less than 50% since November, when palm oil lost its price advantage over other soft oils. According to the Solvent Extractor’s
Association, palm oil import share fell to 44% of India's total vegetable oil imports in January, while soybean oil and sunflower oil
import share accounted for the remaining 56%. If the disruption of sunflower seed oil shipments from the Black Sea region persists,
palm oil is expected to regain some market share in the months ahead.
India palm oil imports
1200
Imports ('000 Tons)
900 2020
2021
600
2022
300
Nov
Dec
Jan
Feb
Sep
Aug
Mar
Apr
May
Oct
Jul
Jun
Figure 5: India palm oil imports (Source: The Solvent Extractors’ Association, India)
5
India palm oil stocks
1000
Stocks ('000 tons)
800
2019
600
2020
400 2021
2022
200
Mean
0
Feb
Sep
Nov
Dec
Jan
Apr
Aug
Mar
May
Jul
Oct
Jun
Figure 4: India palm oil ending stocks (Source: MPOC)
While prices for all major vegetable oils (soybean, sunflower, rapeseed and palm) have doubled in the past 2 years, palm oil have
risen more. As a result, the Indian government has introduced several price-controlling measures, including lowering import duties
for palm oil multiple times (Figure 6), limiting the size of inventories that can be held by merchants as well as suspending cooking
oil and oilseed futures trading. Last month, the Indian government cut its import tax (known as Agriculture Infrastructure and
Development Cess) on crude palm oil (CPO) to 5% from 7.5%. After the cut, the effective import duty gap between Refined,
Bleached, Deodorized (RBD) palm oil and CPO had been widened to 8.25%, from a previous level of 5.5%. However, the Solvent
Extractors' Association of India urged the government to revert the effective import duty gap between RBD palm oil and CPO to
11% in a bid to shield local CPO refineries.
India's effective import duties (%)
60
49.50
49.50
49.50
49.50
50 49.50
41.25
41.25
41.25
41.25
38.50
38.50
38.50
38.50
35.75
35.75
35.75
40 35.75
30.25
30.25
30.25
30.25
24.75
24.75
24.75
30
19.25
19.25
19.25
19.25
19.25
19.25
19.25
13.75
13.75
20
8.25
8.25
5.50
5.50
5.50
5.50
5.50
5.50
5.50
10
0
Crude Palm Oil RBD Palm Olein Crude Soybean Oil Refined Soybean Crude Sunflower Refined Sunflower
Oil Oil Oil
2/2/2021 30/6/2021 20/8/2021 11/9/2021 14/10/2021 21/12/2021 13/2/2022
Figure 6: India’s effective import duties on vegetable oils (Source: The Solvent Extractors’ Association, India)
2021/22 China palm oil imports are lowered to 6.7 million tons, down 5.6% from last month’s forecast due to poor import
margins and palm’s narrowing discounts to other soft oils. China has sharply cut vegetable oil imports in recent months, resulting
in lower palm oil stocks at 0.41 million tons for January (Figure 7), down 29.4% month-on-month, with buyers purchasing on a
hand-to-mouth basis.
Inventories at major soybean in crushing plants have also remained low in recent weeks due to slower imports on deteriorating
crushing margins as a result of rising import costs and weaker demand for soybean meal, following the slump in domestic hog
prices since mid-December 2021. Soybean supply shortages have prompted some soybean crushing plants to completely shut6
down. According to National Food and Strategi Reserve Administration, the Chinese government will release some oilseeds and
edible oils from its central reserves to raise supplies in the country, but volumes have not been disclosed.
China palm oil stocks
1200
1000
Stocks ('000 tons)
800 2019
600 2020
2021
400
2022
200 Mean
0
Dec
Feb
Sep
Jan
Nov
Apr
Jul
Aug
Mar
May
Oct
Jun
Figure 7: China palm oil ending stocks (Source: MPOC)
2021/22 EU-27 palm oil imports are estimated at 6.2 million tons, down 6.1% from last month’s forecast. Despite relatively
robust palm oil shipments to EU-27 early this year, Indonesia’s export regulations have curbed outflows to the region in the near
to mid-term. On top of these, persistently high palm prices and restrictive policies such as Renewable Energy Directives (RED) II
are expected to curb demand for palm oil for this season as well.
• Price Outlook
Malaysia Crude Palm Oil Futures continued the strong rally, with the third-month benchmark contract (FCPOc3) and front month
hitting fresh all-time highs at RM 7108/ton and RM 8163/ton, respectively.
The recent bull run was dominated by Russia’s invasion of Ukraine, stoking fears of global vegetable oil shortages. It was
compounded by the existing bullish market drivers, such as supply tightness, Indonesia’s export restrictions, weather concerns in
South America, strong gains in external rival oils and the crude oil market.
FCPOc3 ranged between RM 5291- RM6470/ton in February, rising from RM 4718-RM 5700/ton in January 2021. Looking ahead,
we expect palm prices to be still dictated by the Ukraine-Russia conflict and external rival oil markets. FCPOc3 is expected to
continue to trend up towards RM 6600/ton, and next potentially towards RM 7108/ton, the recent all-time high. The upside is
supported by firm fundamentals and the prospects of rising demand ahead. However, some profit taking activities are also
expected, especially light of the rapid surge of the past 2 weeks.7 Figure 8: The weekly candlestick of Malaysia crude palm oil futures for third month benchmark contract (Source: Refinitiv) • Market drivers a) War between Russia and Ukraine Uncertainty over sunflower oil supplies due to the war between Russia and Ukraine is spurring demand for palm oil and soybean oil, driving palm oil and soybean oil prices to fresh record highs. With the suspension of port operations and crushing activity in Ukraine, sunflower seed shipments that are scheduled for loading have been delayed. The shipment delays could create a sunflower oil scarcity in destinations such as India if loading is not resumed in the next few weeks. This could provide opportunity for more palm oil imports to fill this gap, but the upside is limited by price-sensitive consumers who are already reeling from spiralling fuel and food costs. b) Palm ending stocks remain at below average levels According to MPOB data, Malaysia January palm oil end-month stocks are expected lower than expected at 1.55 million tons, plummeting to their lowest in 6 months after tumbling by 3.85%. The fall is largely attributed to an upward revision of 31,000 tons to 2021 year-end stocks, making the base higher to January value, and a fall in production. Persistently weak output and stronger palm exports for February are expected to draw end-month stocks lower. c) Indonesia palm oil export regulations In February, Indonesia expanded the Domestic Market Obligation (DMO) regulation to include the exports of all palm and palm kernel related products instead of just CPO, RBD palm olein and used cooking oil. The new rules took effect on 15 February, and all exporters must obtain permits for shipments of all palm products. The regulations are to ensure sufficient cooking oil is available domestically, estimated at 5.7 million kilolitres in 2022. As a result, key palm oil consuming countries have turned to Malaysian palm oil and other soft oils to meet demand.
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d) Unfavourable weather conditions in South America continued to prompt soybean yield losses
The soybean market remains well supported by lower production estimates due to weather woes. Persistent wet weather in North
Brazil has slowed soybean harvesting in 2021/22 and affecting their quality as they need to be dried.
The large number of Brazilian cargoes, which were purchased at end of 2021 for delivery during harvest season starting from
February 2022, has already led to loading delays and now, vessels arriving Brazilian ports face further delays as they have to
wait for the soybeans due to the slow harvesting. Market participants expect February export to be lower than initially expected,
with loadings pushed to March and April.
• Conclusion
The palm market has once again extended its rally and pushed prices to fresh record highs, mainly fuelled by concerns over tight
global supplies, compounded by the Ukraine-Russia conflict, Indonesian Domestic Market Obligation (DMO), South America
soybean crop losses, persistent labour shortages in Malaysia, poor weather conditions and localized flooding, and the current low
palm oil production season.
Early trade flow indicators showed that Malaysian palm oil sellers benefited from more international purchases, but the country is
unlikely able to compensate for all of the Indonesian shipment shortfall, due to its own weak production.
The supply gap due to the Ukraine-Russia war and DMO have led to poorly-covered consumers struggling to find replacements.
As a result, prices will likely stay at current elevated levels until supplies are able to pick up and offset rising demand. Also, the
lifting travel restrictions and preparing for Ramadan Festival amid vegetable oil shortages in many consuming countries will spur
buying activities in the near term, supporting the market further.
Looking ahead, the potential bearish/swing drivers are:
(1) Easing labour shortages in Malaysia and expectations of significant crop recovery into the second half of the year.
(2) De-escalation of the Ukraine-Russia crisis and thereby, easing crude oil and vegetable oil supply tightness.
(3) Persistently unattractive palm prices and diminishing advantages over rival oils in consuming countries.
(4) US Federal Reserve’s tapering plan and interest rate hikes.
(5) US green energy policies.
(6) Omicron waves.9 Refinitiv Commodities Solutions Refinitiv has the answers to all your critical questions. As the largest provider of commodity exchange data, we give you accurate intelligence and the most comprehensive, actionable insights into the world’s agricultural markets. Our unique combination of analysts in the field and technology provides you with the capabilities you need to gain that competitive edge. Trade confidently with the data, insights, and analysis you need to navigate through evolving agricultural commodity markets. Click here to request for a complimentary 30-day Eikon for Commodities trial Refinitiv is one of the world’s largest providers of financial markets data and infrastructure, serving over 40,000 institutions in approximately 190 countries. It provides leading data and insights, trading platforms, and open data and technology platforms that connect a thriving global financial markets community – driving performance in trading, investment, wealth management, regulatory compliance, market data management, enterprise risk and fighting financial crime. refinitiv.com
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