Malaysian palm oil prices rise on lockdown announcement despite confusion

Singapore — Palm oil futures on the Bursa Malaysia Derivatives Exchange rallied on news the government was imposing a two-week lockdown in Malaysia from Wednesday despite confusion about how this would apply to the industry.

At the midday close, the April contract was up MR42 ($9.66) on the day at MR 2,318/mt, with May up MR34 at MR 2,282/mt and June up MR22 at MR 2,242/mt.

However, Monday's announcement said trading on the BMD would not be disrupted.

The market's immediate focus was the possibility of near-term supply disruption and lower harvests. "If the workers cannot go to the plantation for the next two weeks, we are looking at a loss of around 600,000-700,000 mt in production for March," an industry source said, adding that this might bring March end stocks in Malaysia to "levels close to 1.1 million mt." Stocks were in 1.68 million mt in February and 1.755 million mt in January.

On the other hand, a Singapore-based trader said that it was unlikely this rally would be sustained if the cash market did not pick up because of the lack of destination markets, meaning there would be fewer hedging opportunities for traders. This source also added that apart from expectation of less supply in the near term, the weaker Malaysian ringgit against the dollar had also supported futures.

Palm oil faces competition from soybean oil

Another market participant called to the rally in palm prices an "artificial squeeze caused by unforeseen circumstances" and added that while nearby palm prices were expected to be supported for a while by the expected fall in production, there was no real change in the demand situation. This source cautioned that that "Bigger problem may arise if Indonesia will follow suit. India is buying Indonesian palm oil and this will result in a massive supply disruption if Indonesia also effects a lockdown"

However, an India-based buyer was unconcerned, and said that it was likely that lower soya bean oil prices could make the soft oil more attractive than palm oil to Indian buyers. "Soya bean oil futures on the CBOT hit a 13-year low yesterday [Monday]. Harvesting is going on in Brazil, so we can expect cheaper soya bean oil prices," the buyer, who said that weakness in the global commodity portfolio had exerted adverse pressure on the CBOT soya bean oil futures. According to Anilkumar Bagani, head of research at Mumbai based consultancy Sunvin group, "When crude oil is so cheap, biodiesel demand is low. There is no biodiesel mandate in the US to cushion soya bean oil prices. Thus, soya oil has to adjust to remain competitive as a feedstock for biodiesel. It is not likely for China to buy more palm olein either, as the lower Brazilian real has made soya beans very attractive. Thus, China will import more soya beans from Brazil. However, we expect a shortage from now to mid-April mainly due to port congestion and discharge delays caused by quarantine requirements."

Industry confusion

Many participants in the Malaysian palm oil industry reported "confusion and lack of clarity" when asked if operations were still going to continue. "By rights, the ban is on all businesses, except essential item providers. But there is no clear list from the government as to

which businesses are essential," a Malaysia-based producer said. "We are currently in the process of discussing with government officials and are in touch with the Malaysian Palm Oil Board and Malaysian Palm Oil Council" the producer said, adding that these

organisations were negotiating permission for plantations and refineries to continue operating.

According to a document seen by S&P Global Platts, "Please take note that the plantation sector is not listed as one of the essential services under the Order. Malaysian Palm Oil Association (MPOA) and the Association are appealing to the Government to allow plantations and refineries to operate during the restriction movement order in view of its importance to the economy of Malaysia".

Sources said the document was authored by the Malaysian Agricultural Producer's Association which describes itself as the "the oldest and largest employer's trade union in Malaysia" on its website. Others also said that they thought companies would be fined for not complying with the

order, but said that the fine was not punitive enough. "If the fine is what I think it is, the loss to my refinery if I do not continue operations is much more than the fine," a source said.