The Russian-Ukraine conflict that has resulted in a war from February 24 will likely result in Kyiv being unable to meet global demand for vegetable or edible oils this year, analysts say.
The war will also result in supply chain disruptions in Ukraine, where all ports have been closed now. More importantly, India and China will compete for vegetable oils export from Russia, which could put pressure on the global market.
“Due to the (Russian) invasion, it is unlikely that Ukrainian farmers will be able to plant and harvest at a high enough capacity to meet global demand…,” said Fitch Solutions Country Risk and Industry Research (FSCRIR), a unit of Fitch.
Main shippers
It said Ukraine and Russia are both major exporters of vegetable oils derived from sunflower seeds, safflower and cotton seeds. The latest available data show that Ukraine accounted for 23 per cent of global imports of these products, while Russia accounted for a further 11 per cent.
According to the US Department of Agriculture, the Russian-Ukraine conflict is particularly concerning to countries that rely on imported sunflower oil to meet domestic needs. “The main importers include India and China, the largest importers of vegetable oil, as well as the EU and many Middle East and North Africa (MENA) countries including Turkey, Iran, and Egypt,” it said.
On February 24, Russian troops entered Ukraine aggravating the standoff between the two nations. Though both nations have been holding talks, there has been no breakthrough yet on ceasefire.
This has resulted in the Port of Odessa, the gateway for Ukraine exports, suspending its operations leading to wheat, corn, sunflower and other vegetable oils, and barley shipments coming to a halt.
On the other hand, sanctions by the United States, Europe and their allies against Russia, particularly expelling it from the SWIFT system for bank transactions, have also affected trade.
‘Significant exposure’
Fitch Solutions said India and China are “significantly exposed” to the Ukrainian market, importing a combined 3.2 million tonnes in 2020. India accounts for 28.1 per cent of Ukrainian vegetable oil exports, while China accounts for a further 18.3 per cent.
India and China also import vegetable oil from Russia - they accounted for 1.19 million tonnes of the 2.3 million tonnes Moscow shipped out in 2020.
New Delhi and Beijing also imported a combined three million tonnes of vegetable oils in 2020 from Ukraine, which makes it a tough task for Russia to meet the supply deficit created by a drop in Kyiv supplies, Fitch Solutions said.
“This increased demand, combined with the reduced supply, will, however, place significant upwards pressure on prices and so although they will have other sourcing alternatives the price of vegetable oil will rise globally and we believe that there are only limited mechanisms to ensure this increased price does not reach consumers,” FSCRC cautioned.
India and China have significant “bargaining power” in the market which could result in their sourcing from other markets, the research agency said.
Increased substitution
With vegetable oils being the main source of cooking oil, households in India and China that are price sensitive will have to spend more. Though Fitch Solutions says there could be social unrest, costlier cooking oil prices are likely to lead to consumption being affected.
ING Think, the financial and economic arm of Dutch multinational financial services firm ING, said the vegetable oils market could potentially see increased substitution if disruptions persist.
“Although the issues with Ukrainian and Russian supply are coming at a time when there is already tightness in some of the other markets including palm oil. As a result, we could see more substitution towards soybean oil, which again would be positive for soybean crushers and ultimately soybean prices,” it said.
The trend was visible in India, where surging palm oil prices have resulted in a shift towards soyabean oil.
European nations also import vegetable oils. However, sanctions and increased risk of consumer boycotts would mean that they may not look at Russian vegetable oil as an option, Fitch said.
Alternative, a challenge
The USDA said finding alternative vegetable oils will be a challenge in a market that has been facing tight supplies even before the events in Ukraine.
“Drought in Canada last year significantly reduced rapeseed for crush and export. Likewise, drought in South America has reduced soyabean supplies by 14 million tonnes from last year and this is forecast to be the lowest harvest in six years. A similar situation exists with palm oil where supplies have been tight on lower production growth,” it said.
The conflict led to prices of wheat, corn, sunflower oil, soyabean, palm oil, crude oil, nickel, aluminium and barley soaring to multi-year highs. In some cases, they hit a record high, though prices of almost all these commodities have cooled to pre-February 24 levels.
Currently, benchmark palm oil futures which had skyrocketed to a record of over 7,000 Malaysian ringgits (MYR) a tonne ($1,668.45) last week ended at 5,940 MYR ($1,415.80) on Thursday.
May soyabean oil contracts on the Chicago Board of Trade is currently quoted at $1,654.66 a tonne from nearly $2,000 on March 1, while sunflower oil is quoted at $1,604 a tonne against $2,250 on March 7.