Palm oil futures are proving highly susceptible to coronavirus.
Agrimoney’s caution on January 10, as Kuala Lumpur prices set a three-year high of 3,150 ringgit a tonne, that the vegetable oil’s rally was past its best is proving something of an understatement.
Values since then have slumped by 18%, as the alarm signals that Agrimoney warned over, such as overpricing compared with soyoil, have been supercharged by concerns over coronavirus.
Tuesday’s price collapse, at 10.0% alone, was the contract’s worst session since 2008.
Investors are right to be concerned.
The virus - in overshadowing demand for palm oil in China in particular, where the outbreak is centred – is threatening what had been expected to be a major engine for demand growth.
China’s palm imports have been expected by the US Department of Agriculture to expand in 2019-20 by 6.0%, four times the world average, in part thanks to a knock-on effect of another disease.
(African swine fever, in hurting demand for meal feeds, has curtailed China’s soybean crush, in turn undermining its production of soyoil, for which palm oil can be substituted in many purposes.)
Even if coronavirus were quickly eradicated, it would be too late to repair food demand loss during China’s key lunar new year holiday period.
And that is before getting to knock-on threats, such as a potential dent to world economic growth - which oil investors have been particularly keen to factor in, sending Brent crude down nearly 9% over the past week.
That in turn undermines demand prospects for palm oil, which is used largely in making biodiesel.
Although enhanced blending mandates from Indonesia and Malaysia still look on the cards, lower energy prices weaken the case for discretionary output of biodiesel, unless raw material prices show compensatory declines.
Have palm oil prices fallen enough to protect such demand?
They will certainly have improved their credentials in energy market, given that gasoil prices showed a small rise on Tuesday, implying a sharp move in the palm oil-gasoil spread.
But with palm oil having built a premium in the run up to the collapse, and a huge one at that, the vegetable oil may have further to go to secure its appeal on this score.
Nor have palm oil prices yet reached bargain levels, historically, compared with those of rival soyoil, despite swapping their unusual premium reached earlier this month for a discount of more than $50 a tonne.
Sure, Tuesday’s collapse will have given investors with short positions some cause to buy and take profits.
But sustained purchases from trade users may be more difficult to drum up until coronavirus uncertainties clear.