Palm oil supply crunch compels India and China to increase soybean and sunflower oils imports
Increasing biodiesel consumption due to the rollout of B20 biodiesel programme in Malaysia and B30 programme in Indonesia coupled with low production of palm oil will tighten its supply. Top importers like India and China will counterbalance this gap by switching to soybean oil and sunflower oil. This trade shift will result in increased tonne-mile demand and firm vegoil freight index in 2020.
On 8 January 2020, India imposed restrictions on imports of refined palm oil and palmolein from Malaysia due to political reasons. In turn, Malaysia also imposed an export duty of 5% on crude palm oil to discourage exports and encourage domestic refining and consumption as the country has rolled out the B20 biodiesel programme.
India’s refined palm oil imports from Indonesia reached 72,100 tonnes in November 2019, a 20% rise over the previous month. However, palm oil trade on this route is expected to weaken as Indonesian exports decline. For instance, palm oil (crude and refined) exports in October-November 2019 stood at 5.0 million tonnes, a fall of 3.1% as compared with the same period in 2018. This fall can be attributed to the rise in domestic biodiesel demand, prompting the rollout of B30 programme. Meanwhile, the country plans to come up with B40 biodiesel which will further lower exports of palm oil.
The weather forecast for 2020 is unfavourable for palm oil production in Indonesia and Malaysia. Meanwhile, increasing palm oil prices will also contribute to the fall in global imports. In 1H20, palm oil prices are expected to surge between 15% and 20% due to relatively feeble growth in production, coupled with rising domestic consumption of top exporters – Indonesia and Malaysia.
This entire scenario is pushing towards the supply crunch of palm oil. However, it has little to no impact on the demand side. India’s palm oil imports reached 9.3 million tonnes in 2019, up 6% than in 2018. China’s palm oil imports also surged in 2019, the country’s imports of refined palm oil reached 6.8 million tonnes during January-November 2019 compared with 4.7 million tonnes during the same period in 2018; additionally, imports of crude palm oil reached 49,302 tonnes in 2019 compared with only 2,185 tonnes in 2018.
It is anticipated that soybean and sunflower oils are the two alternatives ready to fill the gap in demand. USDA forecasts global production of soybean oil and sunflower oil to increase 2% and 6% respectively in 2019-2020 crop year to reach 56.9 million tonnes and 20.6 million tonnes. Global exports of soybean oil and sunflower oil are also anticipated to reach 11.8 million tonnes and 11.3 million tonnes respectively in 2019-20 crop year, increase of 7% and 3% year on year.
Exports of sunflower oil (including crude and refined oil) from Russia and Ukraine increased 49% and 11% respectively until November 2019 (year on year) and reached 2.7 million tonnes and 5.5 million tonnes. This upward trend will continue in 2020 due to higher planted areas in both Russia and Ukraine compared with last year.
India and China are the top importers of vegoils. China’s imports of sunflower oil and soybean oil reached 1.1 million tonnes and 0.8 million tonnes until November 2019, a surge of 84% and 54% respectively. Similarly, India’s imports of sunflower oil and soybean oil stood at 2.4 million tonnes and 3.1 million tonnes in 2019. Imports of these veg oils are likely to rise as the price spread has contracted among palm oil, soybean oil, and sunflower oil. In the first 23 days of January 2020, the price gap between palm oil and sunflower oil decreased further to $35 per tonne and that between palm oil and soybean oil slid to $10 per tonne. The trend is likely to continue in 1H20, which will dampen the demand for the product and will shift the consumption demand to soybean oil and sunflower oil.
The anticipated growth in soybean oil trade from South America to Asia and sunflower oil trade from the Black Sea to Asia will push up the tonne-mile demand. Veg oil freight rates will also firm on South America-Asia and the Black Sea-Asia, while vegoil freight rates from Strait to India and China will remain flat in 2020.
Indonesia and Malaysia together exported 43.2 million tonnes (provisional) of palm oil in 2019. If the exports of these two countries shrink 10%, they will squeeze about 4 million tonnes of palm oil in the global market. The shift of 4 million tonnes of vegoil trade on South America-India and Black Sea-India will require 10 more MR size vessels. Hence, the chemical tanker shipping industry will benefit from this trade shift.