Factors Behind the Bull Market Short-Circuit and the Way Forward

Hey! Welcome to The Globoil Post, where we share the week's edible oil and agri-trade news highlights.

Today, we have an exclusive interview with Mr. Nagaraj Meda, Founder, Chairman & Managing Director of Transgraph Consulting, who gives industry insights about the effects of COVID-19 on the edible oil industry.

Here’s what Mr. Nagaraj Meda, a seasoned professional in the commodity trade known for his technical analysis has to say!

“Congratulations to Kailash Singh and Tefla’s for starting the Globoil Post. It is important to keep ourselves engaged with industry stakeholders during these tough times. I am sure that Teflas will also evolve itself and secure Globoil's position as the prime and prominent platform for networking, sharing of knowledge and information amongst the industry participants by adopting the right technology and understanding the behavioral aspects of people in the changing times.”

The bull market in vegetable oils lead by palm was short-circuited. Mr. Meda sheds light on the factors that contributed to the end of the bull rally. The market moved ahead of the fall in stocks with very high expectations of Biodiesel consumption in Indonesia. However, the steep fall in stocks, coupled with Corona's entry into China and the decision of OPEC+ countries not to cut crude oil production, led to the short-circuiting of the bull rally.

The impact of COVID-19 has devastated the demand for crude oil, with the global demand falling by 10% to 90.72 MBPD from the 2019 level of 99.99 MBPD. This has resulted in the WTI crude oil prices from April’20 to March’21 averaging around 30 USD / barrel. Consequently, there is a downward revision of 2020 Indonesia Biodiesel production to around 8.73 million tons from the previous projection of 10.98 million tons. Indonesia stocks are expected to increase to 4.5 million tons by Dec’20 from the previous projection of 2.75 million tons. On the other hand, Malaysia's 2020 production is revised down to 18.58 million tons from the 2019 production of 19.86 million tons, which is expected to support prices at bottom levels.

Mr. Meda discusses the impact of COVID-19 on the global and Indian economy, as well as its effect on currency markets and post-COVID-19 recovery. He highlights that the decline in consumer demand has led to a recession, with the 2022 GDP for the US and Europe equal to that of 2019. Asset prices have seen unprecedented volatility, with palm volatility increasing from usual 20% per year to 45%. Food and beverages, personal care, and SME segments are also impacted differently by the decline in consumer spending.

In India, 57% of GDP share is contributed by private consumption. Due to the lockdown, Mr. Meda estimates a permanent consumption loss of 12.5 lakh crores. Fiscal deficit for 19-20 in India is expected to reach 9.5 to 10 lakh crores, up from the previous projections by the Government at 7.5 lakh crores (3.5% of GDP) to 9.5 or 10 lakh crores (around 5% of GDP). Additionally, the CAD for 19-20 is expected at -29 billion dollars, significantly lower than -57.3 billion dollars in 2018-19. Indian exports are expected to fall in 20-21 to 250 billion dollars from the 319 billion dollars of 2019-20 number, leading to a negative CAD despite the steep fall in crude oil prices.

Mr. Meda emphasizes that the global recession is caused by the shrinkage of global trade with anti-globalization and pro-localization sentiment since the last four years. The inability to enhance exports will pose serious challenges to the recovery efforts, but heavy liquidity measures by governments worldwide will try to create a flash-in-the-pan kind of recovery. Overall, the global economy will likely see a large W-shaped recovery spread over a period of 2 to 3 years, with actual recovery depending upon the behaviors of consumers and governments impacted by COVID-19. In the next 5 years, behavioral economics will drive the change.

With Mr. Meda's insightful analysis, we gain valuable perspective on the disruptions faced by the vegetable oils market and the wider economic impact of the COVID-19 pandemic.

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