A Modern Day Tempest: El Nino & Its Effects on the Palm Oils Market

The world weather systems are currently in the grip of El Nino, a naturally recurring phenomenon which is associated with a band of warm ocean water that develops in the central and east-central equatorial Pacific. Essentially this induces a change in normal weather patterns and can severely impact the economies of developing nations within the pacific region associated with it. Agriculture can be one of the hardest hit industries due to abnormally prolonged period of high heat which affects crop yields and lowers production output. In terms of the Specialised Products market, the key commodity which suffers is palm oil with almost 90% of global production coming from Indonesia and Malaysia.

Production, pricing and the export capability of both countries in the region have been especially volatile since the El Nino was first observed. According to the World Meteorological Organisation (WMO), this El Nino will probably rank among the three strongest since 1950. Data shows that it could be comparable to record events in 1997-1998 and 1982-1983. In the top two palm oil producing nations, output fell by 5.5% in Malaysia and 7.2% in Indonesia in 1998, and production slid by 5.1% in Malaysia in 1983. In comments made to Reuters and Bloomberg at the end of March, a leading industry analyst-Dorab Mistry, has forecast that Malaysia’s output in the 2016 season (which ends in September) could drop by as much as 2 million tonnes compared to a year earlier. Meanwhile, according to the Indonesia Palm Oil Association (GAPKI), output is expected to fall in February to 2.3 million tonnes from 2.4 million, due to drought and forest fires, whilst annual output is expected to fall to 32.1 million tonnes, its first decline since 1998.

So what does this all mean for shipping in the Specialised Products markets?

Seaborne palm oils trade is a key a driver for shipping in the South East Asian region with exports to China, India and longer haul to Europe characterising much of the trade. According to the Clarksons Platou Specialised Products Analysis trade statistics, Indonesia exported 20.7 million tonnes in 2014 whilst Malaysia exported 14.5 million tonnes. Clearly this represents a huge market but with the output data outlined above there is little argument that 2015-2016 exports may reduce. In fact, Indonesia exports are forecast to fall to 1.95 million tonnes in February of this year. Export volumes will not be helped by the bullish sentiment that has developed for Crude Palm Oil futures (CPO) on both the Malaysian and Indonesian exchanges as production falls and supply dwindles. Over the last year, futures on the Bursa Malaysia Derivatives Exchange have risen by 543 ringgit from 2,233 ringgit in April 2015 to 2,776 ringgit in 2016; an increase of 24%. The situation here is not helped by increased domestic demand in Indonesia with biofuels regulations mandating an increase in palm oil use in biodiesel production. The country’s B20 program, which mandates a 20% minimum palm content in diesel, will lift domestic consumption providing a floor for product pricing. Another direct result of higher palm oil prices is more interest in buyers for cheaper soybean oil from South America, something that is happening in India as we speak. Both commodities can substitute each other, with food and fuel processors tending to switch between both depending on pricing.

The bottom line of this for Specialised Products is that there will be less employment opportunities for owners, particularly if one considers the number of newly built MR product tankers and 19,900 DWT IMO II stainless steel seeking business for virgin tanks from the Straits to the continent. So an increased supply of tonnage, putting pressure on freight rates is possible. Meanwhile, an active ex-US transpacific trade and ex-South America soybean oil trade exacerbates this further with tonnage unable to find backhaul opportunities after discharge in Asia.

It is clear that El Nino presents significant issues for producers and ship owners; the phenomenon is supposedly now easing off with the WMO saying in its latest February release on the subject, that it has now passed its peak strength with neutral conditions returning Q2 2016. Of course nothing is set in stone when it comes to the natural world but there is little doubt that the market will likely remain challenging for a little while to come for all stakeholders.

josh blog

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