Navigating around India’s palm oil ban

  • India Premium
  • Saturday, 18 Jan 2020

PLANTATION companies with high-capacity refineries will need to quickly source new export markets for their refined palm oil products, should India’s unofficial boycott on Malaysia take a turn for the worse in the coming months.

According to local industry experts and planters, the market at the ground level is expecting a full-blown ban on Malaysian palm oil by India soon.

This is seen as a retaliation to Prime Minister Tun Dr Mahathir Mohamad’s remark on India’s invasion of Kashmir last October as well as his recent comment on India’s new citizenship law.

Primary Industries Minister Teresa Kok, at a palm oil event on Thursday, indicated that Malaysia would be looking at Uzbekistan, Kazakhstan, Nigeria, South Africa, Pakistan and Saudi Arabia as new export destinations for local palm oil.

India is the world’s largest edible oil importer, while Malaysia is the world’s largest exporter of refined palm oil and palm olein. Indonesia is the world’s largest producer of crude palm oil (CPO).

In 2019, India became the largest importer of Malaysian palm oil with 4.410 million tonnes, up 51% or 1.896 million tonnes from 2.514 million tonnes in 2018.

For Malaysia, palm oil accounts for 2.8% of the country’s gross domestic product and also represents about 4.5% of the country’s total exports.

Given such high palm oil exports to be affected this year if the ban is imposed on local palm oil, what will be the next course of action by local refiners?

Basically, most big planters such as Sime Darby Plantation Bhd, FGV Holdings Bhd, IOI Corp Bhd, Kuala Lumpur Kepong Bhd, Sarawak Oil Palms Bhd (SOP) as well as Wilmar International Ltd, which has a big presence in Sarawak, will be affected.

A plantation industry consultant points out that “for a fact, everyone (in the industry) knows what India really wants is the raw material – CPO – to help beef up the under-utilised capacity of its own edible oil refineries”.

He also blames the intense lobbying by the Solvent Extractors Association of India – the apex body of the vegetable oil trade – which has represented over 800 refineries in recent years.

“It is really a sad situation for Malaysian palm oil exports given the latest political twist. India is now looking to source just CPO instead of the imported refined palm oil products.

“Furthermore, to effectively boycott Malaysian CPO and opt to buy from Indonesia, which has a US$10 premium over Malaysian CPO prices, is such a ridiculous move by India, ” adds the industry consultant.

Local CPO for February shipment is available at US$800 per tonne on a free-on-board (FOB) basis, compared with US$810 per tonne from Indonesia.

For now, he says that Malaysia’s palm oil trade situation with India is still under control, especially for those refineries with long-term Letters of Credit (LCs) for the month of January and February, whereby Indian importers will still need to adhere to.

However, the real dilemma for local refiners will start from March onwards once the LCs expire and India starts to reject shipments from Malaysia, he points out.

The Malaysian Palm Oil Association (MPOA), which represents big plantation companies in Malaysia, also believes that India is playing a “zero sum” game to boycott local palm oil.

Its CEO Datuk Nageeb Wahab notes that “as the world’s largest importer of edible oils, India is committing suicide by purchasing its palm oil requirements from just a single source, Indonesia.

“This is on the back of the current low palm oil inventory situation and Indonesia’s biodiesel B30 mandate, which will take up more palm oil consumption.”

On the other hand, there are loopholes in the system, says the industry consultant.

One avenue which Malaysian palm oil exporters could take is re-routing their refined palm oil and CPO using the flexible terms under South Asian Free Trade Agreement (Safta).

In recent years, traders were often seen using Safta to re-route palm oil and soybean through Bangladesh, Nepal into India under the cover of Safta.

“This will help Malaysian palm oil exporters to re-route to Bangladesh and Nepal to offset the Indian government’s move to potentially stop Malaysian palm oil imports, ” suggests the industry consultant.

However, the Solvent Extractors Association of India in recent years has strongly demanded for the loophole in Safta to be closed. This avenue had been used to circumvent customs duty by re-routing palm oil and soybean oil imports to Nepal and Bangladesh.

For example, palm olein imported from Nepal is of Malaysian and Indonesian origin, while soybean oil is of South American origin, and were getting duty exemption for such imports.

India charges 50% tax on refined palm oil and 45% on refined soyoil and another 10% surcharge on the duty.

The re-routing is leading to a monthly Indian government revenue loss of about Rs50 crore (about US$7mil) and also, hurting in the northern-eastern parts of India, the industry consultant explains.

Another avenue for Malaysian planters, who have a big presence in oil palm plantations in Indonesia, is to export the commodity from the republic.

When news of India’s potential boycott on local palm oil broke in October last year, it was reported that two GLC planters, Sime Darby Plantation and FGV had prepared themselves with some action plans.

Sime Darby Plantation given its strong presence in Indonesia told Bloomberg that it could switch sale offerings between CPO and differentiated products to hedge against any impact on export revenue.

The planter will also explore other markets to close the demand gap. Indonesia is a key market for Sime Darby Plantation. representing about 20% of its total CPO exports in 2018.

It was reported recently that FGV, whose annual export to India is about 300,000 tonnes, is also taking immediate remedial measures to mitigate the negative impact from the potential boycott.

FGV is also expected to divert significant tonnage to other key markets. But the planter admits that these are short-term measures.

When contacted, SOP group CEO Paul Wong says, “We are still trying to assess the impact from the potential boycott by India.“We also don’t have long-term LCs with importers from India. Normally, our trade is done on a shipment-by-shipment basis.”

Maybank IB Research in its recent report expects that SOP stands to lose the most with the unclear restrictions from India.

“Among the refiners, we believe SOP will lose more given its sizable refining capacity at 450,000 tonnes per annum with India being one of its key export markets, ” adds the research unit.

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