Shift in trades following invasion of Ukraine
? CPO prices are extremely volatile following Russia’s invasion of Ukraine.
? The event has disrupted Ukraine’s sunflower oil exports and it remains uncertain when these exports will resume.
? CPO prices stand to benefit in the short term as consumers shift their purchases to other edible oils or sourcing destinations to cover the shortfall.
Impact on CPO price after Russia’s invasion of Ukraine on 24 Feb
? On 24 Feb 2022, Russian president Vladimir Putin ordered an invasion of Ukraine by Russian Armed Forces. A day earlier, Ukrainian President Volodymyr Zelenskyy declared a state of emergency for a period of 30 days in Ukraine.
? The ongoing war has led to the closure of some sunflower crushing plants and ports in Ukraine which has disrupted production and exports of sunflower oil and meal. This represents a significant disruption to the global edible oils trade flows as the market was looking forward to an increase in sunflower oil exports from Ukraine to partially relieve the current tight supplies in global edible oil markets.
? This is made worse by the recent decision (27 Jan) by Indonesia to impose Domestic Market Obligation (DMO) on palm exporters to ensure domestic cooking oil availability. The DMO requires palm oil exporters to sell 20% of their export volumes domestically at a stipulated price by the government (below market price). This has led to delays in issuance of export permits and inability of some exporters to fulfil new obligations. Indonesia is the world’s largest exporter of palm oil (54% share of global exports).
? We believe palm oil prices had priced in some premium to reflect the geopolitical risks prior to the Russia-Ukraine conflict. The premium pricing expanded following the invasion of Ukraine, as active month CPO in futures market rose sharply by 8% on 24 Feb 2022. However, on 25 Feb 2022, the future CPO price fell by 7.5% as the market was concerned about demand destruction.
Russia and Ukraine’s position in global edible oils supply chain
? Ukraine is the world’s largest producer and exporter of sunflower oil (market share of 47% of global exports), while Russia’s share in the global exports stands at 29.9%. The two countries accounted for 60% of the global sunflower oil production in 2020-21. Sunflower oil is the world’s third-most traded vegetable oil after palm and soybean oil.
? Oil World had projected Ukraine to export 4.29m tonnes (+48% yoy) of sunflower oil in Feb-Sep 2022. In view of the closure of crush operations and ports in Ukraine, buyers will need to scout elsewhere to temporarily fill the gap in supply – mainly palm oil and soybean oil. Uncertainties also remain over how long it would take for Ukraine’s exports to resume and if there will be trade sanctions on Russia’s exports.
? Other concerns include the spike in fertiliser prices, which is likely to raise cost of production for oil palm producers in 2H22F. Russia accounts for 13% of the global trade of key fertiliser intermediaries and almost 16% of the global trade of key finished fertilisers.
Upside to CPO price; upstream planters that sell spot could benefit
? Panic buying by consumers to cover the temporary shortfall in edible oil supplies from Ukraine is likely to continue until the situation improves. Palm oil and soya oil are likely to benefit from this trend. As such, CPO prices in the near term are likely to stay high and above our average CPO price forecast of RM4,100 per tonne for 2022F, which has not accounted for the disruption in sunflower oil exports from Ukraine The current high prices may correct significantly if a resolution is reached and edible oil trades resume. Other potential risks to high CPO prices are potential cuts in biodiesel mandate. Planters that sell mostly spot, like Hap Seng Plant, Ta Ann and most Indonesian planters are likely to benefit from the spike in CPO prices. Planters’ share prices have reacted positively to the surge in CPO price over the past few weeks. There could be upside to planters’ 1QFY22 earnings and our CPO price forecasts. Our top planter picks in Malaysia/Indonesia/Singapore are KLK/DNSG/First Resources.