Bi weekly dd February 5th 2024.
Of optimism and pessimism.
Since the start of the year, we have seen opposing economic forces at work, with pronounced pessimism around China and lingering optimism in America and Japan. Europe a bit caught in the middle with some optimism in some countries and pessimism in others.‘Markets’ still want and/or expect the Fed and ECB to cut interest rates, to boost the economy, this year as inflation calms, but on both sides of the Atlantic, central banks are tempering expectations as inflation remains too high.
Disruption of usual trade routes (Black Sea, Red Sea, Panama Canal) remains a source of nervousness. Trade flows adapt quickly to a new reality, but cannot 100% avoid inconveniences and cost increases. Exports of agricultural raw materials from the Black Sea region to Asia, such as sunflower oil, now avoid the route via Suez and the Red Sea and sail via the Cape of Good Hope, which may make certain flows from South America more interesting again. Palm oil shipments from Asia to Europe, that normally transit Suez, now sail longer and consume more fuel, emitting more CO2 and driving up freight prices (since 1/1/2024, ships to EU are required to offset CO2 emissions during the voyage by purchasing an equivalent number of EU allowances under the emission trading scheme -EU ETS).
Optimism was also hard to find in China where Evergrande, the most indebted property developer in the world (abt. $300bn), was recently court ordered to liquidate due to its inability to come up with a viable plan to restructure its debt. The real estate sector, one of China’s economic growth engines, accounts for about 30% of the world's second-largest economy and media report that over 50 other Chinese developers have defaulted or missed payments in the past three years. Economic growth is expected to weaken further on weak consumer confidence and the contraction in the real estate sector which contributes to slowing economic activity. The loss of demand for agricultural and other commodities is unpredictable.
The situation brings back memories of the U.S. subprime crisis in 2008 and makes one wonder if the collapse of the building sector could have a big cascading effect on suppliers like mining companies in countries as far as South America and jeopardize global growth prospects. The situation also put some downward pressure on petroleum prices, after the manufacturing sector showed a fourth straight month of decline in January.
Things can get nasty but can also turn out better than expected. China is an export-oriented economy and government interventions may limit damages. Meanwhile subdued demand from major buyers of edible oils & fats, China and India, weighed on the market….
Palm oil
Although still at historically high levels and been moving up and down just under 4.000 ringgit for months, crude palm oil futures trended back lower, after some recent price optimism, due to weakness in competing edible oils. In some markets palm oil prices have been at an unusual premium over other oils and compared to other oils palm is perceived to be too expensive.Last week, the April delivery contract on the Bursa Malaysia, dropping by about 6%, experienced its biggest weekly decline since May. The announcement in India, the world's largest importer of edible oils and fats, to jack up efforts to increase local oilseed production in order to reduce imports of vegetable oils also weighed on market sentiment.
The Chinese economic difficulties also dampened oil producers’ optimism and Chinese buying will be followed up closely. China has enough stock heading into the Chinese New Year period but did also show some buying interest for forward positions. Key to all this is what they will do after their New Year festivities. And there is always hope that demand from India will recover.
Soybean oil
Weather concerns over South America (for Argentina as well as for Brazil) are being poked up regularly and will stay till the full crop is made and harvested. But it is a very vast area to watch… meanwhile “the funds” hold record short positions.In Chicago, soybean futures broke the $12/bushel resistance level to settle at, a little more than two-year low of $11.88 on the march position as a combination of factors made US beans too expensive.
In recent weeks, prices in Brazil dropped and soybeans have been shipped to the US. This price drop comes from harvest pressure with farmers selling a crop that came about a month earlier than normal. Brazilian farmers had not sold much in advance due to weather scares and started selling as soon as the beans came off the land.
In Chicago, meal and oil also trended lower last week. The imports of cheaper feedstocks for biodiesel (+ HVO & renewable diesel) into the US started weighing on domestic oil prices. Additionally in EU crude soybean oil seems to be returning to its less artificial value considerably below crude rapeseed oil prices.
Rapeseed oil
A lack of buying interest and a declining soybean complex caused downward pressure on seed prices which gave up almost all of the gains accumulated in January. The still very limited demand has made oilseeds particularly vulnerable to the pressure of a still very heavy soybean complex. “Managed money” reduced their rapeseed short positions on the Euronext Exchange a bit but are still holding a sizeable net short. Canadian rapeseed prices also experienced a rapid decline with zero exports in January.
In EU the ample production of oil exceeded demand from food and biodiesel producers. This supply push and lower seed prices pushed oil values lower.
It is not uncommon to see lower demand and lower prices at the start of the year and the early Brazilian harvest contributed to the bearishness. However, seed stocks may start to decline fast as we move on and food demand may pick up considerably as we get out of the winter months. The market is already looking closer at this season’s production and carry out, and the market structure (carry or inverse), also a telltale sign of stock evolution, is to be watched.
Sunflower seed oil
In past years global sunflower seed oil consumption has grown consistently, mainly due to expanding production and competitive pricing. This season, consumption may even exceed production which would result in lower carry out stocks and this may contribute to higher price formation. Sun oil did follow the downward trend of soybean oil but the question arises if it can go much lower. Once the market in EU starts moving in style on the buying side it may put a floor in the market.Olive oil
The lower production in the last two seasons, due to drought-stricken olive groves around the Mediterranean Sea, sparked historically high prices for olives and olive oil and consequently caused a 20% drop in global olive oil consumption. Prices now retreated a bit, coming off from their peak but there are again concerns over continued dryness and its impact on the next production cycle, as some forecasters are already predicting an even hotter 2024.The first part of winter 2023-24 has been wet over much of the western Mediterranean and producers hope that the much-needed spring rains from February through May will allow a recovery of stressed olive trees and contribute to restore groundwater levels and to a normal next harvest. Until then stocks will remain unusually low and prices unusually high.
Biodiesel
In Rodeo California, Phillips 66 is completing the conversion of its San Francisco Bay area petroleum refinery, into one of the world’s largest renewable fuels facilities with an annual production capacity of 800 million gallons of lower carbon intensity transportation fuels (abt. 2.6Mmt). Not clear yet what feedstocks will be used but global soybean oil production is 61Mmt and annual soybean oil consumption in the US is about 12Mmt. ‘Rodeo Renewed’, expected to fire up end march, will produce renewable diesel and sustainable aviation fuel.In order to reduce its import and to further strengthen its energy resilience, mid-January, the Indonesian Ministry of Energy and Mineral Resources said it would raise its (subsidized) biofuel blending mandate from 30 to 35%, taking effect in February 2024, with a target of abt. 12.5Mmt.
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Disclaimer
Unless otherwise mentioned the crude oil values quoted in these documents are prices landed in EU without import duties, handling, storage, financing, refining, packing, transport or any other cost related to bring the product to market. They are used as market trend illustration. Substitution of oils is possible but different oils have different fatty acid profiles and are not all interchangeable for all applications. One can make biodiesel from all oils and fats but one cannot make mayonnaise from coconut oil. This document is exclusively for you and does not carry any right of publication or disclosure. This document or any of its contents may not be distributed, reproduced, or used for any other purpose without the prior written consent of AVENO. The information reflects prevailing market conditions and our present judgement, which may be subject to change. It is based on public information and opinions which come from sources believed to be reliable; however, AVENO doesn’t guarantee the correctness or completeness. This document does not constitute an offer, invitation, or recommendation and may not be understood, as an advice. This document is one of a series of publications undertaken by AVENO and aims at informing broadly a targeted audience about the edible oils & fats market. AVENO’s goal is to keep this information timely and accurate however AVENO accepts no responsibility or liability whatsoever with regard to the given information.