Sticky palm oil development
Kashmir comment may cost Malaysia
THE palm oil industry has been firefighting one issue after another and the latest one with the possibility India may cut its purchase of palm oil from Malaysia is turning out to be a problem the industry is threading carefully on.
A 10% reduction in palm oil purchases by India will cost Malaysia more than half a billion ringgit a year, according to an industry insider.
“In 2018, India purchased Rm6.84bil worth of palm oil and palm oil-based products from Malaysia. If India decides to cut just 10% of this, that’s more than Rm684mil.
“One should also note that India actually bought even more palm oil from Malaysia this year, so the impact could be bigger on Malaysia. At a time when Malaysia is affected by the EU’S palm oil ban, a cut in purchases will be detrimental to the industry,” he says.
For perspective, between January and September 2019, India purchased 3.9 million tonnes of palm oil from Malaysia, marking a 107% increase compared to the same period in 2018.
In comparison, India imported about 2.51 million tonnes of palm oil from Malaysia in the full-year of 2018.
India has maintained its position as the largest Malaysian palm oil export market for the fifth year since 2014.
It is also worth noting that palm oil exports volume to India in the first nine months of 2019 (9M19) is larger than the palm oil exports to China and European Union (EU) combined.
China and the EU are the second and third largest buyers of Malaysian palm oil respectively between January and September 2019.
Publicinvest Research says in an earlier note that India made up 28% of Malaysia’s total palm oil exports in 9M19.
“This year, Malaysian palm oil saw a significant rise in Indian market share, up from 28.7% to 57.8%, thanks to the preferential import duty on Malaysian refined palm oil for the first nine months,” the research firm pointed out.
Reuters reported last week that the Indian government is considering punitive measures on the purchase of certain Malaysian products, including palm oil, as a tit-fortat reaction on comments on Jammu and Kashmir.
For context, Indian-administered areas of Jammu and Kashmir were one of the states in India, which has now become “union territories”.
India is said to be upset over comments made to those territories and Malaysian officials are reporetedly working behind the scenes to soothe its largest customer for palm oil.
For now, any talks about India’s move to curb imports from Malaysia remains speculative in nature, pending confirmation from the Indian government.
However, if any action is to be taken, the palm oil industry would likely take the first hit, given its importance in the Malaysia-india trade.
The impact on the palm oil industry will also be bad for Malaysia’s overall exports performance, which is expected to remain lacklustre in 2019 and 2020, at an estimated growth of only 0.1% and 1% respectively.
A quick check on the Malaysia External Trade Development Corp (Matrade) website shows that palm oil is Malaysia’s seventh largest product segment for exports in 2018 and was worth Rm38.66bil.
India’s measures to curb Malaysian palm oil imports, which may include a higher import duty, would be a double-whammy for the Malaysian palm oil industry.
Earlier in September this year, India increase the import tax on Malaysia’s refined palm oil from 45% to 50% for a period of six months until March 2, 2020. This was done to reduce imports and boost India’s local refining activities.
Maybank IB Research has said in an earlier note that Malaysia will lose its preferential tariff treatment with the higher tax rate and India’s demand for palm oil will partly switch to Indonesian exports.
This, as a result, would reduce Malaysian palm oil exports until India’s higher import tax rate expires.
Impact on large companies, smallholders
Starbizweek has contacted several plantation giants in Malaysia in an attempt to gauge the severity of India’s punitive measures on Malaysian palm oil, if imposed.
A spokesperson for FGV Holdings Bhd - one of the world’s largest CPO producers - describes the uncertainty surrounding India’s possible measures as “grave”, adding that “there are potential longer term negative impacts if the uncertainties persist”.
“FGV’S current annual exports of CPO to India amount to about 300,000 tonnes, making it a key market for us.
“We are taking immediate remedial measures to mitigate the situation and expect to be able to divert significant tonnage to other key markets, which will offset much of the potential negative impact. However, these are short term measures.
“The value of Indian imports of FGV’S palm oil is predicated on several factors, chief among which is CPO price,” says the spokesperson.
Malaysia’s largest plantation player by market capitalisation, Sime Darby Plantation Bhd (SDP), says that its total CPO export into India for 2018 was approximately 600,000 metric tonne.
“These were sent from our operations in Malaysia and Indonesia, representing about 20% of our total CPO export for the year.
“Although exports from Malaysia may be affected, Sime Darby Plantation is in a position to soften the impact via exports from Indonesia, where it also has a substantial production capacity,” the company says.
Sime Darby Plantation adds that it has the ability to switch sale offerings between CPO and differentiated products, allowing the company to be in a preferred position to hedge against any potential impact on its export revenue.
“One of the main challenges for the expansion of export markets comes in the form of increased regulatory changes which include reduced imports, fluctuating taxes, tariffs and levies.
“Regulatory challenges will remain as part and parcel of the palm oil industry and the company is well placed to manage this risk, as and when it arises. At the same time, Sime Darby Plantation continues to explore other markets to close any demand gaps,” it says.
Meanwhile, IOI Corp Bhd says the company does not export CPO directly to India.
“IOI’S CPO is mainly used for our own downstream activities and the balance is sold to third party buyers,” it says.
Kuala Lumpur Kepong Bhd also says that it has no direct sales to India.
However, analysts say that the entire Malaysian palm oil industry would be affected by India’s move to curb palm oil exports, regardless of the company having sales exposure to India or not.
“When it comes to edible oil, the populous India is not self-sufficient and will have to export from others. But, if the Indian government introduces export restrictions on Malaysia, buyers from India will purchase from other countries, most likely Indonesia.
“If this happens, the lower demand for Malaysian palm oil will push down the price. In such event, everyone suffers regardless you are a big company or a smallholder,” says an analyst.
CPO prices in Malaysia have remained soft in 2018 and 9M19 largely due to high CPO inventory levels, coupled with market uncertainties related to the Us-china trade talks.
According to the Malaysian Palm Oil Council, average CPO price in Peninsular Malaysia in 2018 was RM2,235 per tonne, as compared to RM2,783 in 2017.
Meanwhile, CPO price continued to trend lower between January and September this year, with an average price of RM2,002. In comparison, the average CPO price in the same period last year was RM2,346.
“We forecast CPO price recovery in 2020 led by expected tightening of palm oil supply over the next two years.
“But, if the palm oil purchase from India is curbed by its government, this will affect the expected recovery.
“This means the price recovery may be less than expected or even no recovery at all, depending on the severity of India’s measures,” the analyst says.
When asked about what Malaysian planters could do to reduce the possible impact of India’s punitive measures, the analyst says that plantation companies should lower reliance on the Indian market.
“For example, if Indian buyers turn their attention to Indonesia palm oil, it also means that Indonesia will sell to other markets.
“Perhaps, Malaysia can tap into these markets,” he says.
CIMB Investment Bank’s regional head of plantation research Ivy Ng also says that planters must look for alternative markets, adding that lower purchase by India is “negative” for Malaysian palm oil industry.
“China is one of the markets to be considered, given its appetite for edible oil consumption. However, the process to diversify sales markets will take time and therefore, companies will feel a temporary impact from any action by India.
“Currently, Indonesia palm oil trades at a discount compared to Malaysia. If India increases purchase from our neighbour, the price discount will be narrowed as Indonesian palm oil price will increase.
“We can make our palm oil attractive by offering lower or competitive prices to buyers from other markets. But, before we take any such action, we must wait and see the decision by India and understand the impact first,” says Ng.
In an earlier report, she said India’s restriction on palm oil imports from Malaysia would cause India’s downstream producers to purchase more palm oil from Indonesia producers at the expense of Malaysian producers such as Hap Seng Plantations Holdings Bhd and Ta Ann Holdings Bhd in the short term.