Demand set to grow for Black Sea sunflower oil in 2020

Singapore — The Black Sea sunflower oil market reversed a decade-long downward trend in 2019, as the Platts sunflower oil FOB Black Sea assessment climbed 22% between January and late December.

Looking forward to 2020, the question is: can the upward trajectory of sunflower oil prices be sustained amid bumper harvests of Ukrainian and Russian sunflower crops? The main focus of year ahead will be the high production of Black Sea sunflower oil, but also the high demand from destination as the dynamics of global demand structures for vegetable oils realign.

Record yields due to ideal weather conditions -- including timely mid-summer rainfall to replenish moisture levels in soil -- boosted sunflower seed production in both Ukraine and Russia for the 2019-20 crop. Sunflower yields in Ukraine reached a record high average of 2.5 mt/ha, up from 2.28 mt/ha a year previously. In Russia, the average yield for the 2019-20 harvest climbed 16% year-on-year to 1.86 mt/ha.

The high profitability of sunflower crops has seen the planted area increase significantly in Ukraine over the past decade. The 2019/20 planted area for Ukraine's sunflower crop is 97% higher than the planted area in the year 2000, at 5.8 million ha. The upward trend in planted areas and record yields has led to a 2019/20 Ukrainian sunflower harvest estimated at 15.5 million mt of seeds, a 3% increase from the record crop in 2018-19, according to USDA estimates.

In Russia, 14.5 million mt of sunflower seeds are expected to be harvested for the 2019-20 campaign from a planted area 7% higher on the year at 8.2 million ha, meaning the crop is 14% larger than Russia's record 2018-19 net crop.

The record supplies of sunflower seeds means sunflower oil exports in the year ahead are set to challenge records achieved in 2018-19. According to USDA estimates, Ukraine's sunflower oil exports in 2019-20 will reach 6.2 million mt, up from 6.06 million mt in 2018-19. As for Russia, exports are set to increase to 3 million mt from 2.7 million mt a year previously.

The greater volumes of sunflower oil available for export in 2020 means Black Sea producers are well-equipped to supply sunflower oil in international markets.

GROWTH OF DEMAND IN INDIA AND CHINA

India and China collectively import 40% of the world's sunflower oil, and demand for sunflower oil from these two major consumers is set to increase in 2020, to the benefit of Black Sea producers.

Firstly, rising palm oil prices has narrowed the spread of palm oil with soybean oil and sunflower oil, stimulating demand from price-sensitive consumers to switch to alternative oils. Stagnating palm oil production and rising biodiesel mandates have fed a bullish market sentiment to palm oil prices.

Furthermore, lower vegetable oil volumes in China have increased their need for imports of available vegetable oils.

China imports mainly soybean and crushes it domestically to create meal for pig feed. When crushing soybean, approximately 70% of the soybean ends up as meal, with the remaining 30% as oil. China's crushing of soybeans has fallen since its hog population was reduced by around 200 million pigs by the African Swine Fever epidemic, according to industry officials' estimates. China's reduced demand for soybeans has reduced soybean crushing, thereby limiting soybean oil production.

Additionally, trade tensions with the US and Canada have restricted China's soybean and canola oil imports. The development of US-China trade talks, with a phase one trade deal now complete, and the recovery of the Chinese pig herd will determine the extent to which China's soybean imports and domestic crushing rates return to typical levels in 2020.

In India, sunflower oil imports are expected to rise from 2.4 million mt to 2.6 million mt in the 2019-20 Indian MY (November-October), as sunflower oil prices become more competitive, according to research group Sunvin Group India.

Russian sunflower oil exports to India are expected to increase 550% on the year to 650,000 mt in 2019-20 Indian MY.

Higher Russian sunflower oil imports will detract from Ukraine's exports to India, which would reduce Ukraine's market share from 90% to 66%, while Russia's would increase from 4% to 25%.

Despite the realignment of market share between Russia and Ukraine, Indian imports of Black Sea sourced sunflower oil collectively are set to increase by an estimated 125,000 mt on the year, to 2.375 million mt.

CLIMBING CURRENCIES

However, the upside potential of growing sunflower oil exports to major markets in 2020 could be restricted by the strengthening currencies in the Black Sea, as prices for Black Sea sunflower oil in US dollars rise.

The Ukrainian hryvnia has appreciated 16% against the dollar between January 1 and late December 2019, nearing a four-year high in December. The sharp increase in the volume of government bonds purchased by non-residents has strengthened the currency, Chairman of the Board of the National Bank of Ukraine (NBU) Bohdan Danylyshyn said.

To combat this, Ukraine's central bank has been under pressure to weaken the currency to help export-orientated industries. Meanwhile, the depreciating dollar has strengthened the Russian ruble by 10% against the dollar between January 1 and late December, pushing the ruble to hit a near 18-month high in December. The trajectory of the Black Sea currencies will be central to how sunflower oil exports perform in 2019-20.

THE 2020-21 SUNFLOWER CROP

Sowing of the 2020-21 sunflower crop will begin in the spring months in 2020, with harvesting of the new crop beginning around late August in Ukraine, and September in Russia.

The pressure of new crop sunflower oil supplies typically sees prices dip around October, and eyes will be on the weather conditions through the early spring and summer to see whether the Black Sea can expand on record production rates for the 2020-21 season.

-- George Duke, george.duke@spglobal.com

-- Edited by James Leech, newsdesk@spglobal.com