Oleochemical markets to see continued reduced supply on feedstock volatility

By Leela Landress Perez—

Disruption and volatility in the global palm complex has put strong upward pressure on fatty acids, fatty alcohols and glycerine prices as lower oleochemical operating rates, continued maritime logistics delays, high vegetable oil prices and spreading Covid lockdowns in China will likely continue into the second quarter.

The palm oil complex has maintained elevated levels since prices began their ascent starting in June 2020 and despite recent record highs in March this year, the trend does not look likely to see much relief in the first half of 2022.

Global vegetable oil supplies fell during the Covid-19 pandemic, shrinking despite a slowed demand growth rate. The tighter supplies have affected the largest volume vegetable oil on the globe,  palm oil.

Continued Malaysia labour issues have led to slower growth in palm oil production in 2021 and into early 2022, further straining inventories. Palm oil supplies relative to demand are seen as thin, and a comfortable restoration of stocks could be at least a couple of cycles away.

Producers in Malaysia have said that there is a shortage of more than 75,000 workers resulting in a potential 20-30pc hit to palm oil production. Output slipped in 2019-2020 and again a year later, though harvests are forecast to recover in calendar-year 2022.

Since the beginning of the pandemic palm oil volatility has increased with prices hitting record highs this year and showing little hope of a softening trend as ongoing labour shortages in Malaysia, uncertainty around Indonesia´s export policies, uncertain Chinese demand and the unexpected Russian invasion of Ukraine will exacerbate volatility in already strained markets.

As shown by the illustration of USD Palm Oil futures, the width of the Bollinger Bands has increased since the start of the Covid-19 pandemic and recently dramatically increased since the beginning of the war in Ukraine.  

Bollinger Bands are volatility bands placed above and below a moving average, typically 20 days. The outer bands are set at 2 standard deviations above and below the moving average line. Volatility is measured by the standard deviation of the price, which goes up when volatility increases and goes down when volatility decreases. The bands automatically widen when volatility increases and contract when volatility decreases.

The lower indicator in the illustration, the Bollinger Band Width, measures the percentage difference between the upper band and the lower band. Band width decreases as Bollinger Bands narrow and increases as Bollinger Bands widen. Because Bollinger Bands are based on the standard deviation, falling band width reflects decreasing volatility and rising band width reflects increasing volatility.  Since the begging of the Russian invasion of Ukraine, the Bollinger Band Width rose from below 10pc to reach 30pc before settling at 21pc on 21 March.

Additionally, Indonesia’s recent export rule continues to upset palm oil and derivatives markets. There is growing uncertainty regarding the Indonesian domestic marketing obligation (DMO) policy as it has seen frequent changes.

Oleochemical Production Rates Reduced

The ramp-up in prices in the global vegetable oil markets has put oleochemical producers at odds with margin levels and production rates have been curtailed in recent months.

Glycerine and fatty acids markets have seen fewer offers in recent weeks as sellers in the region have stepped back because feedstock costs are seeing extreme volatility and the markets are concerned about cascading Covid-19 lockdowns across China.

The Asia fatty alcohol market is also subdued at mid-March because of the uncertainties prevailing on the key feedstock oils market.

Oleochemical production has seen reduced operating rates in southeast Asia for a few months, but with the recent volatility in in the palm complex, oleochemical producers will not likely run much production considering the high raw material costs seen in recent weeks.

Additionally, sources in the region say that if China sees widespread lockdowns oleochemical operations could halt across the region.

Tens of millions of people are living under lockdown in China, as the country battles its worst Covid-19 outbreak since the early days of the pandemic.

This outbreak has spread far faster than previous waves of less infectious variants, with daily cases skyrocketing from a few dozen in February to more than 14,634 on 21 March -- the highest figure since the early 2020 outbreak in Wuhan.

The number is low compared to other countries, but it is alarmingly high for a nation that has attempted to eliminate outbreaks with a strict zero-Covid policy throughout the pandemic.

Nationwide lockdowns could impede the flow of container movement as importers worldwide prepare for the coming peak season later this year.

The lockdowns in Shenzhen, Zhejiang, Shanghai, Jilin, Suzhou, Guangzhou and Beijing  imposed in recent weeks are expected to heavily restrict container movement at these ports which will, as seen in the past, prove to be further damaging for the global supply chain.

Oleochemicals sources in the region said finding space on ships was difficult in February, but that March had improved slightly, although it remains very difficult to find space.