The year began on a challenging note with major sell-offs in equities, crude oil and related commodities. To many of us, the selling in vegetable oils, including palm oil, seemed to be coming from macro players like hedge funds who were using the broad situation as a reason to short vegetable oils.
These players made a lot of money in the crude oil and related markets, but may have come unstuck in the vegetable oils market. The fundamentals of supply and demand had already begun to tighten from December 2015.
2015 was the year of a severe El Nino phenomenon; the effects of dry weather are being noticeably felt in current CPO production. The Indonesian government and industry have launched a National Biodiesel Programme. It is performing better than expected with monthly production and consumption running well in excess of my earlier projection of 200,000 tonnes of palm biodiesel, and touching almost 250,000 tonnes.
Last year, crude oil prices declined dramatically as sanctions on Iran were lifted and we have seen Brent go down to levels we could not have imagined. There have also been some fears about China and its transition from an export- and asset-based economy to a consumption- and services-based nation.
Given these and other headwinds, the vegetable oils market has come through well and prices have recovered to very remunerative levels. Once again, India has been the stellar performer. Its economy remains an island of high growth in an otherwise shaky world. This has translated to high growth in the consumption and import of vegetable oils.
Palm oil performance
From the time dry weather commenced in May 2015, the question on everyone’s mind has been: ‘What effect is this El Nino having on 2015-16 palm oil production?’ The answer, we now know, can be summed up in one word: ‘Enormous’.
CPO production in Malaysia peaked in October 2015 and, from November, began a descent which is currently in full swing. Despite almost record production in the period between March and October 2015, palm oil production in Malaysia for the 2015 calendar year fell short of that in 2014. Production in Indonesia suffered in the last quarter but not to the same extent; I believe Indonesia produced 32 million tonnes, as expected in calendar year 2015.
Let me explain what I call the ‘triple whammy’ in palm oil production that we are currently experiencing. The biological high cycle ran from March to October 2015 – a normal duration of eight months. From November, a normal new low cycle started. A double whammy comes from the dryness of February-March 2015 and May-October 2015 as a result of the El Nino. And the effects of this were felt most in the lean production season from November-March. So that makes this a ‘triple whammy’.
