The veg oils, biofuels, and fertiliser crises and their effects on seaborne trade
Since the start of the pandemic, some essential commodity prices have followed a surging trend at an unseen rate in comparison to the previous years: soybean oil 162%, rapeseed oil 171%, sunflower oil 104.29%, palm oil 180%, palm kernel oil 253%.
These are expected to keep rising in the short term, and are likely to get hit by the fertiliser shortage that was already happening prior to the Russia-Ukraine war. Russia accounts for almost one-fifth of fertilizer exports in the previous year.
The fertiliser crisis has emerged in line with increasing gas and energy prices since mid-2021, and the situation was ramped up with the Russia-Ukraine conflict. The natural reaction from the farmers is to cut down on either the use of fertiliser all together or plant less.
Aside from the impact that high fertiliser prices will eventually have on the yields for edible oils, many of the related products like sulphuric acid and phosphoric acid are struggling with higher input costs from natural gas and ammonia, putting pressure on the usual global trade flows this year.
With no Russian phosphates in the market and China banning exports until May, global prices have skyrocketed.
It has been a similar story on sulphuric acid of rising freight costs and squeezed product availability due to bottlenecks in China as COVID-19 lockdowns hamper activity. More trading momentum was seen earlier this month, but for many players this was largely speculative at the higher numbers being touted. What is evident is a drop in South Korean sulphuric acid volumes for Q1 2022. After holding steady around 240,000 per month through 2021, exports in March fell by nearly 30%.
On the edible oil front, there’s ever-increasing local demand in the US for soybean oil and canola oil as a part of the decarbonisation effort. The focus is on getting more renewable diesel units online, and majority of these refineries are consuming vegetable oils as feedstock for their products. In 2021, there was record high US soybean production, and in 2022 US farmers are expected to plant 4% higher than the previous year – that is a record 91 million acres of soybeans; however, we are yet to see a relaxation of the prices. Higher fertiliser costs and a tighter global edible oils market will maintain pressure on all parties involved: both the food and beverage industry and the biofuel manufacturers in the US. Production output will be prioritised for the local market, limiting exports from the US in the near-term.
Similarly, South American soybean oil strongholds like Argentina and Brazil are also dealing with supply and “ever high” price issues; although both countries have faced pressure from environmental organisations, Brazil has been combatting high commodity prices since 2020 by lowering the blend mandate that was later restored in mid-2021, whereas Argentina not only lowered the blend mandate to 10%, but also increased the price of biofuels by a whopping 25% in April 2022.
The shortage of usual sunflower oil volumes out of the Black Sea is only going to increase the pressure on transatlantic eastbound soybean oil movements. This trade lane has been experiencing a thinning of the position list more recently, with the lucrative CPP market pulling available tonnage away as many ships opt to ballast into the US Gulf given the healthy rates still apparent in the market there. Indonesia and Malaysia together account for more than 86% of the world’s palm oil exports, and India is the top buyer. With the current lack of usual SBO and SFO volumes that originate from the Black Sea region, India was forced to increase its palm oil imports, resulting in a price hike.
India imported just over one million tonnes of vegetable oils in March 2022, up 13% from a year ago and driven by a resurgence in palm oil buying. Imports of palm oil rose to 539,793 tonnes in March, up 3% from a year ago and above the 454,794 tonnes imported in February, according to data from trade body Solvent Extractors' Association (SEA) of India.
This was a reversal of the trend seen since late last year, with higher palm oil prices driving more Indian consumers towards soybean and sunflower oil.
With reduced stock levels and soaring freight costs, sourcing soybean oil out of South America will prove difficult in the coming months.
The challenges of commodity pricing and volumes will likely be met by a chemical tanker sector in the throes of a strong rebound. After a sluggish 2021 weighed down by softer CPP demand, we have seen a spike in MR rates as US refineries ramp up output to mitigate the loss of Russian material, while the Asian CPP market is also picking up sharply.
As a result, swing tonnage has largely exited the chemical space and tightened up vessel availability in Q2. Reconfiguring trade flows on edible oils and fertiliser acids will be tricky enough to manage, but a higher freight environment will make it even more challenging.