Asian palm oil market drops 5.7% on coronavirus fears

The Asian palm oil market Friday dropped nearly 6% on the day on fears sparked by the coronavirus' inexorable spread across the globe.

The benchmark Bursa Malaysia Derivatives May contract ended Friday MR137 ($32.50), or 5.69%, below the previous settle at MR2,322 /mt, surpassing the low of MR2,439/mt on Tuesday.

A number of market participants said the fall on the BMD was a spillover from global financial into the commodity complex.

"The S&P 500 opened Monday at 3,309 points, and hit a low of 2,879 points today, and the Dow Jones Index is also down more than 1,000 points. This affected the futures on the Dalian Commodity Exchange, and the RBD [refined, bleached and deodorized] palm olein contract for May hit limit down, which has in turn weakened the CPO futures on the BMD," a Malaysia-based trader said.

The falls in global markets were attributed to concerns that the coronavirus was becoming more prevalent in countries other than East Asia, and market participants were skeptical about the ability of various governments to contain the spread.

Market participants surprised

Friday's drop took a number of palm market participants by surprise, but most agreed that the fall was down to the bearish demand outlook caused by the expanding reach of the virus.

"After the fall on Tuesday, I had actually expected the market to have rebounded by today. Reports of higher production were already priced into the market, and we saw some recovery on Wednesday and Thursday due to bargain buying activities. As new cases emerge, people are worried that this is going to escalate into full blown pandemic, ultimately killing consumer demand," a Singapore-based trader said.

Low demand from major buyers India and China has already sent many market participants reeling. Demand from India has been tepid after buyers were told to avoid Malaysian-origin palm oil, and the narrowing spread between rival soft oils has prompted Indian buyers to switch to sunflower oil and soybean oil.

"While the spread between crude palm oil and sunflower oil has widened to around $120/mt, from around $102.50/mt yesterday, a spread of more than $130/mt will incentivize buyers to switch back to palm oil. If palm oil maintains a discount of more than $120-$130/mt over soft oils at Indian ports, it could once again regain its market share," head of research at Mumbai based consultancy Sunvin group Anilkumar Bagani said, adding that this spread would have to be maintained for a sustained period.

In China, RBD palm olein demand has also been affected as cities are in lockdown. While sources said Chinese buyers were active in the market this week, sellers said these were relatively small volumes, and traded at a significant discount. "The quantities were for August shipments, and traded within a range of $612.50-$619.00/mt. I chose not to sell as I do not have such a bearish view of the market. However, there are other sellers who have to push the product, and chose to sell at these numbers." an Indonesia-based trader said.

A seller said that a decision to sell at those levels had been made based on observations of the palm oil production cycle. "Production typically bottoms out in January and February before recovering. March and April is the time to harvest. Plantations usually try to optimize the harvest before Ramadan, which signifies larger output, hence, the discount is justified."

Another Malaysia-based producer summarized the situation as "production is coming back, and we are incentivized to sell. It is better to sell at these levels, rather than not to sell as we have no idea about the extent [to which] this virus may spread. We thought it was going to be contained in Asia, but the sheer number of cases in Iran and Italy is terrifying. When it hits countries where the movement of people is difficult to restrict, it will be impossible to contain the spread."

Producers are also worried about the impact on biodiesel demand of restrictions on movement. "With crude oil falling at such a rate, this will kill demand for biodiesel," a Singapore-based trader said. An India-based buyer added that weakened biodiesel demand in the US would also lower soybean prices, in addition to reduced demand from China. "There are abundant supplies of soybean and demand from Chinese buyers is already affected. If we see demand for biodiesel waning, this will lower soybean prices, and ultimately, palm oil prices, which have to remain competitive as a feedstock."

In addition to the coronavirus effect, market participants also attributed the BMD's drop to the market being overbought. "We were waiting for the correction to come. It was delayed but has come with a bang. From MR2,135 in October, it took 72 trading sessions to reach MR3,135/mt. However, it has taken only 30-32 trading sessions to fall to MR 2,300/mt," another trader said. Market are bracing for a further sell-off. "There is no end in sight, and I think those holding long positions will continue to liquidate," a Singapore based trader said.