Palm oil spat unfavourable for India


  • Plantations Premium
  • Saturday, 25 Jan 2020

INDIA may be biting its own tongue for boycotting crude palm oil (CPO) from Malaysia.

This is the view shared by local industry experts who reckon India will be forced to pay premium prices for its CPO and also face risks associated with other seed crops such as dry weather.

Some experts even believe that the boycott from India could be beneficial to Malaysia - by encouraging local producers to switch to higher-value exports.

To recap, although there has not been an official ban on the import of CPO from Malaysia, some Indian palm oil importers who followed the advice of Mumbai-based Solvent Extractor’s Association (SEA) to boycott the commodity from Malaysia, are importing from Indonesia despite paying a premium price. SEA is a trade body representing India’s vegetable oil importers.

How much more are Indian buyers having to pay for their CPO from Indonesia? Going by one Bloomberg report, suppliers from Indonesia have started charging a premium of US$15-US$20 per tonne over benchmark prices.

However, checks with a trader in Malaysia reveal that Malaysian CPO for February shipment was available at US$800 a tonne on a free-on-board (FOB) basis, compared to US$810 from Indonesia.

The trader explains that the US$10 difference may seem small, but its impact is significant because buyers, especially in large consumer markets like India, buy in bulk.

This in turn could hurt consumers in India, experts point out, as the price hikes are likely to be passed on to end-products for the consumer market there.

“For India to continue buying CPO from Indonesia at an additional US$10 premium is not going to be sustainable.

“Some of Indonesia’s supply is mandated for biodiesel.

There is also domestic consumption. Thus, fulfilling India’s sudden surge will raise prices, ” the industry expert notes.

On Jan 23, the third-month benchmark CPO futures for April was traded RM48 lower at RM2,925 per tonne.

Currently, stock levels for CPO are low for both Malaysia and Indonesia.

Hence, given the low production of the commodity in both these countries, the industry expert points out that India’s stance on limiting the source of its supply to Indonesia could be detrimental.

This is more so if there should be any weather-related issues affecting other seed crop supplies such as soy, sunflower, corn and rapeseed oils.

“I believe it would harm India in the long run. Those crops are annual crops compared to palm oil which has relatively a stable supply, ” the expert says.

India, the world’s largest vegetable oil importer, relies on Indonesia and Malaysia for its palm oil supplies.

Zero-sum game

Malaysian Palm Oil Association chief executive officer Datuk Nageeb Wahab says the palm oil industry is concerned about the ongoing palm oil spat, adding that Malaysia should pursue more diplomatic efforts to mend the situation with India in relation to its purchase of CPO.

India became the largest importer of Malaysian palm oil in 2019, after it bought 4.41 million tonnes, which was a 51% increase from 2.51 million tonnes in 2018.

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

So far, there are no visible signs of any diplomatic initiatives between the two countries related to this matter.

Notably, Malaysian officials have said that no meeting has yet be scheduled between the two countries at the ongoing World Economic Forum in Davos.

Nageeb does point out though that if India’s stance does not change, Malaysia would need to look for alternative markets.

The good news, Nageeb says, is that demand for palm oil would continue to grow. He points out that the world demand for food grows at between 3% and 4% every year. In addition, the B20 and B30 biodiesel mandates from Malaysia and Indonesia would increase CPO demand of around four million to five million tonnes.

Overall, he describes the current situation with India as a zero-sum game.

“In the end, total production of palm oil from both countries will remain the same. If India buys more from Indonesia, the latter will then see a shortage due to its existing demand, including the country’s biodiesel needs. That shortage, in turn, will likely be filled by Malaysian suppliers, ” Nageeb points out.

It should be noted that India has also restricted the import of refined palm oil products from both Malaysia and Indonesia. This move is said to be driven by the government’s move to boost its own domestic refinery industry.

Prominent palm oil analyst James Fry says the recent restriction on refined products from Malaysia may be “a blessing in disguise” for the country’s downstream sector, as it allows Malaysia to switch to higher-value exports.

Kenanga Research has also echoed similar views on India’s recent import curbs, saying that should Indonesia fulfil India’s CPO demand, it should be at the expense of Indonesia’s refined palm oil exports to other countries.

“Malaysia could then benefit by filling the refined palm oil (higher-value) void. In essence, the demand-supply dynamics remain favourable to CPO, ” it adds.

Despite the Malaysia-India spat, CPO prices have rebounded after recording their biggest weekly drop since November 2008 last week.

From its high of RM3,139 per tonne this month, the commodity fell almost 10% to RM2,828 last Friday following India’s move to restrict imports of refined palm oil and palm olein this month. The April futures price has since rebounded to RM2,925 per tonne at the close on Jan 23.

Nageeb expects the current bullish CPO price trend to persist for a longer period. He believes the CPO price will average between RM2,700 and RM2,800 per tonne this year on the back of weak production from dry weather and lower fertiliser application.

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