A very oily problem
Palm oil industry’s worst fear comes true
THE worst fear among the palm oil fraternity was brought to life this week.
The EU Parliament on Wednesday had unfairly voted to ban the use of palm oil biodiesel from its list of biofuel programme effective by Jan 1, 2021, despite strong protests by the affected small oil palm farmers from Malaysia and Indonesia since the proposal was mooted in April last year.
Indonesia and Malaysia are the world’s top two palm oil producing countries, accounting for nearly 90% of global supply.
A large portion of European palm oil imports is used to make biofuels, giving the industry’s top two producers cause for concern as they fear overall demand will fall from the EU ban.
Plantation Industries and Commodities minister Datuk Seri Mah Siew Keong had openly condemned the EU’s ban on palm oil biodiesel, saying that the EU is practising a form of “crop apartheid”.
He also describes the EU vote as a black day for free trade and that is is most discriminating against palm oil.
Palm oil expert, LMC International chairman Dr James Fry, also finds it rather puzzling for the EU Parliament to vote on the palm oil biodiesel ban as most palm oil producers have met with the standards set by the EU for the import of palm biodiesel.
To put into perspective, the EU Parliament vote on Jan 17 is still not finalised pending the final draft of the legislation, .
However, should a new legislation take effect in the immediate future, industry observers say Malaysian oil palm players and exporters will definitely feel the brunt going forward.
This will definitely put pressure on Malaysia’s palm oil exports, export earnings, demand and the crude palm oil (CPO) prices going forward.
Last year, local palm oil exports to the EU dropped by 3.3% to two million tonnes from a year earlier. The EU market accounted for about 12% of Malaysia’s total palm oil exports, making it the second biggest buyer after India.
About 46% of total palm oil imports into the 28-nation economic bloc are used for biofuels.
Maybank Kim Eng Research, in its latest report, expects some 3.3 million tonnes of palm biodiesel demand to be wiped out over the next three years, an equivalent of 5% of 2016’s global palm oil consumption and 1.6% of 2016’s global 17 Oils and Fats consumption.
“This is medium-term negative for palm oil demand,” says the research unit, adding that its impact will be mitigated by the recent slowdown in new plantings in this region and accelerated replanting required in the coming years.
Public Investment Bank (PIVB) Research has also estimated that local palm oil export volume to the EU region will be slashed by at least 50%, or about 800,000-900,000 tonnes, if the EU’s new legislation on palm oil biodiesel ban takes effect.
Local palm oil exports could face some pressure given the current high level of palm oil inventories in Malaysia.
As at the end of December 2017, the local palm oil stocks stood at 2.73 million tonnes, which is the highest level in over two years.
Another bigger concern is whether more countries would join the EU ban as “it could affect the palm oil demand significantly,” adds PIVB.
On the other hand, the research unit says the palm oil biodiesel ban by the EU is not a good solution for all parties.
“About half of the EU crop biodiesel production is dependent on imports, and not from crops grown by the EU farmers.
“Therefore, the decision of banning palm oil used as biofuel will not only affect the palm oil trade significantly, it will also make renewable fuels more costly as palm oil is the one of the most cost efficient vegetable oils,” PIVB says. To minimise the impact of reduced exports to the EU, the research unit suggests the Government to start looking at new export markets and promote the use of palm oil in other ways.
Yesterday, the Sarawak government has expressed its willingness to subsidise oil palm smallholders in diversifying into other crops to mitigate the effects of the EU’s move to ban palm oil biofuels starting 2021.
Its deputy chief minister Datuk Amar Douglas Uggah Embas says planters switching to other types of agriculture would receive financial assistance.
“For example, within a family of smallholders, they can rear goats or cattle or fruit crops like pineapple and durian for eligibility to apply for the subsidy,” he adds.
Softer demand
Kenanga Research also believes that the strongly negative perception of palm oil in Europe will likely result in the EU ban on palm oil biodiesel laws being passed.
Upon enactment of the law, Kenanga expects softer near-term demand from the EU.
“We think that with the EU’s local rapeseed oil likely to replace palm biodiesel as the main feedstock, this would create a supply gap in edible oils for food consumption.
“This could be a potential market for palm oil, depending on the degree of consumer sentiment, and overall result in a shift in EU demand from biodiesel into food usage over the longer run,” it says.
Maybank Kim Eng says the EU ban on palm biodiesel is negative for palm oil demand and prices in the medium term.
“The only positive is that the palm oil industry is given three years to find an alternative market.
“Furthermore, the impact will also be somewhat mitigated by the expected slowdown in the industry’s palm oil growth from 2020 given recent slowdown in new plantings in this region and accelerated replanting required for the older estates in the coming years,” it says.
For now, Maybank Kim Eng made no changes to its forecast CPO average selling price at RM2,600 per tonne in 2018 against RM2,792 per tonne in 2017.
Kenanga Research is still neutral on the plantation sector with CPO prices expected to trade sideways on limited catalysts but with low downside given supportive crude oil prices.
At the recent MPOB seminar on Thursday, prominent palm oil experts namely Dr James Fry of LMC International pegged the 2018 average CPO price at RM2,615-RM2,650 per tonne while Indonesia Palm Oil Association’s Dr Fadhil Hassan forecast the average CPO price at RM2,810-RM2,850 per tonne.
Factors which will influence CPO price movement this year include the performance of Brent crude oil prices, the spread between palm oil and soybean oil, EU and US policies and CPO production as well as the impending Saudi Aramco listing.