palm oil producers must brace for crude palm oil prices to fall sharply as coronavirus-led lockdowns around the world curb consumption and boost stocks, said leading industry analyst James Fry.
As the lockdowns shuttered restaurants, many industry players had expected that demand for palm oil, used in everything from instant noodles to shampoo, would remain relatively well supported.
But Fry's analysis of the demand destruction recorded in China - the number two palm importer and first country hit by the coronavirus outbreak - suggests there will be a "sizeable" hit to palm oil consumption.
"Our current estimate is that China during its lockdown lost close to one month of demand compared with what one would have expected prior to COVID-19," Fry, chairman of consultancy LMC International, told Reuters exclusively.
"Much of the lost consumption will never be clawed back." The shift away from eating out has by itself reduced overall vegetable oil demand, Fry said, adding that home cooks use less cooking oil than restaurants and caterers.
Longer-term, the weakened global economy will also curb demand.
"Cutbacks in wages for a period, or outright unemployment, will hit consumer spending for as long as it takes for the current sharp recession to end," he said.
"As a result of this demand shock, export volumes are likely to be very weak from Indonesia and Malaysia in 2020," he said of the world's top producers.
STOCKPILE BUILD-UP As exports slow to a trickle, Fry expects palm oil stockpiles to surge in top producers Indonesia and Malaysia, and as a result place further pressure on crude palm oil (CPO) prices that have already slumped by 25% this year.
Fry said demand for palm oil as a fuel was the only potential bright spot for the market, but only after "the high stocks will force CPO prices down towards the price of crude oil".
"Free market, price-competitive biodiesel demand...should then stop CPO prices from falling even further." Malaysia benchmark crude palm oil prices this year have plunged nearly 25%, while crude oil prices are down about 50%.
MINOR SUPPLY DISRUPTION Fry said supply-side disruptions due to the coronavirus would be minor, but that palm oil output for 2020 is expected to be weak due to droughts and cutbacks in fertiliser applications last year.
He also flagged a potential labour shortage in Malaysia if foreign workers return home for the Eid holidays at the end of April.