Bulls to drive vegetable oil markets in H1 2022

The bullish prospects for vegetable oil prices will show no sign of abating in 2022, Vivek Pathak, managing director of Athena Tradewinds, an India-based trading house predominantly dealing in sunflower oil, told S&P Global Platts in an interview.

“We have seen the highs for this current year, but prices in 2022 will surpass current levels — I foresee a far better and bullish scenario,” Pathak said, his optimism largely stemming from economies reopening as pandemic-related restrictions ease.
Concerns about demand shifting to competing soft oils have been rampant, considering the narrow spread between the edible oils. But this scenario will be short-lived, allowing palm oil to reclaim market share in 2022, according to Pathak.

“In India — the largest buyer of vegetable oils — the spread between soybean oil and palm olein is currently $43/mt, and then at $66/mt in December, after which it widens for the January to March quarter, and further still in the April to June quarter,” Pathak said. “Prices in the second quarter of 2022 are discounted by $100/mt compared with the first quarter. “These are very attractive levels for palm oil, which is nicely placed against soybean oil in the first quarter.”

“Anyone who is currently holding a long position in palm oil cannot hedge for the forward months as prices are too low currently. Those who are holding long positions are long on the nearby months, and the rest are holding short positions, hence demand on the forwards will be present,” said Pathak, who cautioned the optimistic outlook would prevail as long as current spreads are maintained.

The spot price of crude palm oil at the largest producer and exporter Indonesia has risen by 60% in the last year to $1,335/mt by Nov. 11, according S&P Global Platts assessments. Over the same period, soybean oil prices from the largest exporter Argentina have risen by 45% to $1,369.5/mt, while the cost of sunflower oil in Ukraine rose 30.5% to $1,396/mt.

Prices supported for now

“Despite the record crop of 17 million mt in Ukraine this year, sunflower oil still commands a large premium over soybean oil, which expands further in the first half of 2022,” said Pathak. “While the narrower spreads will see some low demand for palm oil against soybean oil, the reopening of the HoReCa [hotels, restaurants and catering] sector should result in an uptick from February 2022. Energy demand is also growing and with crude oil prices expected to touch $100/b in end-December or early January, so palm oil prices will be supported.”

Palm oil is preferred over other edible oils in the HoReCa sector, especially in price-sensitive markets such as India, Pakistan and Bangladesh as it is cheap and has good stability at high temperatures used in frying.

A much-discussed supply recovery in vegetable oils will not happen in the first half of 2022, Pathak said. “Malaysia has announced they will import foreign labor and the sentiment that this would ease tightness is likely already priced in, which is why the April contract on the MDEX is around $250/mt lower than spot [as of Nov. 11],” he said. “I don’t think the labor situation will ease until the second half of next year. COVID-19 will not disappear so fast and we will have to live with new variants.”

“Thus, while we might see a high production forecast for palm, this may not actually translate into fruits being plucked,” he said. “Cash palm is difficult to find in both Malaysia and Indonesia, and this situation will continue until the labor situation improves.”

Status quo in India

Pathak also expressed the view that while there has been little clarity on changes to duty structure in India after Dec. 31, prices will not ease in the first half of 2022, possibly preserving the status quo. “The duties might remain or retreat further, based on current estimations and fundamentals. I am not expecting a duty hike till June 2022,” said Pathak.

A slight improvement in oilseed production in 2021-22 by India may not move vegetable oil prices lower, Pathak said, as even if domestic soybean production crosses 10 million mt, consumption, which has been slowed by the pandemic, will “come back with a vengeance.”

Soybean is the most grown oilseed in India and the US Department of Agriculture expects India’s 2021-22 soybean crop to rise to 11.9 million mt, up 14% from 10.4 million mt in 2020-21.

For 2020-21, India’s vegetable oil consumption is seen in a range of 20 million-21 million mt, of which domestic production may account for about 9.5 million mt and imports are expected to be around 12.5 million mt-13.5 million mt, according the industry trade body the Solvent Extractors’ Association of India.

“A few hundred thousand tons of extra domestic production from India is unlikely to swing international markets in the first half of 2022,” Pathak said.

At the midday close on Nov. 12, the benchmark January palm oil contract on the keenly watched Bursa Malaysia closed MR92 higher from the previous settle at MR4,973/mt ($1,193.71).

Platts

Tags: Bangladesh, soybean oil, Indonesia, prices, Pakistan, soybean, India, Malaysia, palm oil, USA, edible oil, sunflower oil