India's veg oil demand durability seen uncertain; China, biodiesel demand bright spots

An abundant domestic mustard crop coupled with moderated economic growth and low demand at the shop shelf could dampen vegetable oil markets in India, although a resurgent demand from China and increased biodiesel mandates may support international vegetable oil prices, market analysts and traders said at a recent trade conference in India.

"India's economy is expected to see moderate growth for the next 2-3 months and I expect GDP growth to fall from 7% to 5.5% for 2022-23," Anubhuti Sahay, Head of South Asia Economics Research (India) at Standard Chartered Bank, said at the Global Castor Conference organized by vegetable oil trade body Solvent Extractors' Association of India on Feb. 25.

"We will see high interest rates and durability of demand is unclear," Sahay said, adding that commodity prices may rise in the second half of the year as China's demand is returning.

In 2022-23, the country's edible oil imports are expected to be around 14.5-15 million mt -- the highest in four years but lower than its pre-pandemic import of 14.9 million mt in the marketing year 2018-19 (November-October), B V Mehta, head of SEA told S&P Global Commodity Insights at the conference.

Trade participants were, however split on short term outlook for vegetable oil prices in the country with some seeing bearish signals ahead.

"We are expecting an abundant supply of mustard and currently demand is low at the retail shelf, so this is why I feel a pickup in prices [of vegetable oils] is unlikely," Chandrark Kothadia, director at Mangalam Finserv told S&P Global.

India is the largest buyer of vegetable oils in the world followed by China.

Argentina's crush in question

Argentina, the world's largest exporter of soybean oil, has been hit by a severe drought in 2022-23 and availability of soybean seed will be a challenge for Argentine crushers this year, Nagaraj Meda, head of commodity analysis firm TransGraph Ltd said.

However, as availability of seed may be a challenge, "the trend of soybean oil being costlier than sunflower oil will continue, and this is depressing the market right now," Meda said.

The world's largest exporter of soybean oil has been hit by a severe drought in 2022-23 and availability of soybean seed will be a challenge for Argentine crushers this year, Meda said.

Argentina's soybean crop harvest in marketing year 2022-23 (April-March) was forecast at 33.5 million mt, nearly 15 million mt lower than early-season expectations and a 14-year low, by the Buenos Aires Grain Exchange Feb. 23.

"The assumption is that they will import 5.5 million mt of beans. But it will not be as much from Brazil. It will be mostly from Uruguay and Paraguay, and it depends on the Parana river water levels," Meda forecast, adding that the current crop could potentially to be further revised down to 34-35 million mt.

Tepid demand vs biodiesel mandates

With the two biggest vegetable oil buyers India and China well-stocked, destination demand is currently bearish, but market watchers are hopeful that global vegetable oil consumption would end up higher for the year driven in part by rising biodiesel mandates, which use vegetable oil as feedstock.

"For the four major vegetable oils -- palm, soy, sunflower and rapeseed – we think there may be a 20 million mt increase in consumption in 2022-23 mainly because of a 7 million mt increase in industrial use," Meda told S&P Global.

For 2021-22, the US Foreign Agricultural Service pegged the world's vegetable oil consumption at 203.9 million mt and this is expected to go up to 212.9 million mt in 2022-23, according to their monthly oilseeds and oils report Feb. 9.

Major biodiesel and vegetable oil producers such as Indonesia and Brazil are currently ramping up the ratio of biodiesel mixed into gas oil with the countries.

Indonesia's mandate of a 35% mix started in February and the markets expect the mandate to absorb an additional 2 million mt of palm oil from its production of around 47 million mt this year.

The country's biodiesel production is estimated to have used 9.6 million mt of palm oil - up from about 7.36 million mt in 2020 when the mandate ratio was set at 30%, according to Indonesia's ministry of Agriculture and the Indonesian Palm Oil Board or GAPKI.

Meanwhile, Brazil is looking to increase biodiesel blend at the pump to at least 13% in March from the current blend of 10%. Brazil previously was expected to implement a 15% biodiesel-diesel blend at the pump in 2023.

In terms of prices, the keenly followed crude palm oil futures contract on Malaysia's commodity exchange could trade between MR 4,400/mt-MR 4,800/mt ($983.02 - $1,072.39) in the coming month, Biren Vakil of Paradigm Commodity Advisors told S&P Global, provided China's demand remains tepid.

Crude palm oil futures hit a 4-month high on March 3 on the Bursa Malaysia Derivatives exchange with the benchmark closing at MR 4,332/mt at midday close.