Olam warns on palm oil prices, as virus saps Chinese appetite for eating out

Olam International boss Sunny Verghese cautioned on palm oil prices, even as futures plunged to a four-month low, as he qualified ideas of the extent to which agricultural commodity demand is impervious to coronavirus damage.

Mr Verghese, the founder and chief executive of the Singapore-based commodities trader, acknowledged that “people got to eat” – a factor many investors have cited as cause for agricultural commodity consumption to be considered relatively resilient to economic woes caused by Covid-19.

However, he also flagged the importance of the foodservice and restaurant sector, which was feeling the pinch in China, the centre of the virus outbreak, and where “demand is definitely significantly impacted.

“One segment in China, which is seriously impacted is the foodservice segment as people go less to restaurants and eat out,” Mr Verghese told investors.

‘Demand to be much weaker’

This would be a depressant for demand for “all food items [for which] the foodservice segment is an important channel”.

This included palm oil for which foodservice was responsible for “about 40% of the demand”, Mr Verghese said.

“So we expect the palm oil demand in China to be much weaker at this point in time as a result of the virus.”

With China the “largest demand generator for palm oil after India”, with 9% of global consumption, this was one significant dent to consumption prospects.

Another was India itself, where relatively high prices of palm oil - besides the country’s political spat with leading palm exporter Malaysia – had driven demand to rival vegetable oils, which include rapeseed oil and soyoil.

‘Softening and weakening’

“Our view is that the first half of 2020, [palm oil] demand will still continue to be weak,” Mr Verghese told investors.

“We feel that there will be softening and weakening of palm oil prices,” particularly later in 2020, “as seasonally more supply and production will happen,” with South East Asian production typically peaking around October.

“Then everything depends on really how quickly the coronavirus can be contained.”

He noted too that the "significant crop in crude oil prices" prompted by Covid-19 worries was "also a negative at this point in time for palm oil prices", given the substantial demand for the vegetable oil stemming from biodiesel plants.

The comments came as Kuala Lumpur palm oil futures tumbled by 5.7% in Kuala Lumpur to settle at 2,319 ringgit a tonne.

The slide took to 10.9% the drop this month in Kuala Lumpur prices, on a benchmark contract basis, with values so far in 2020 down 24%.

‘Negatively affected’

Separately, Rabobank too noted the dent to Chinese palm oil demand from Covid-19, saying that the outbreak had “disrupted trade, production and supply chains; depressed out-of-home consumption; and forced some foodservice outlets to close.

“While Chinese domestic demand for staples is still expected to be stable during the outbreak, due to less dining out, Chinese consumption of palm oil in the foodservice channel will be negatively affected.”

Logistical squeezes caused by port hiccups and transport bottlenecks will hamper distribution too.

Nonetheless, the bank described virus-caused setbacks as “short term”, and stuck by a forecast for palm oil futures averaging 2,500 ringgit a tonne in the October-to-December quarter, ahead of the 2,338 ringgit a tonne at which the November lot closed on Friday.