ECRL deal — could China buy extra 500,000 tonnes of palm oil?

Bringing inventory level to 2.4m-2.5m tonnes will have a positive impact on palm oil prices


China’s purchase of an additional 500,000 tonnes of local palm oil may help trim the glut the sector is facing, after Kuala Lumpur and Beijing agreed to push forward the RM44 billion East Coast Rail Link (ECRL) project.

Industry consultant MR Chandran said the palm oil sector is saddled with a 2.9 million tonnes glut and a commitment from China to buy at least half a million tonnes of palm oil in the near term could reverse the sector’s fortune.

“The key thing now is to reduce our inventory. If we can bring it back to a 2.4 million to 2.5 million tonnes level in the next four to five months, that is going to have a positive impact on prices moving forward. That itself would be fantastic for the short term,” Chandran told The Malaysian Reserve recently.

He said the government should also work on a long-term palm oil purchase arrangement with China over the period of the ECRL deal, which is expected to be completed in December 2026.

“The ECRL is not a one-year project. Throughout the deal, if China can commit to buying a certain amount from Malaysia, that would send a good signal.

“The market as we know is very sensitive to inventory levels. If the uptake is higher by even 500,000 tonnes per year, that will be good,” he said.

On Monday, Prime Minister Tun Dr Mahathir Mohamad said Malaysia will “take advantage” of the 640km rail project to work out the purchase of more palm oil by China.

Tun Daim Zainuddin, who negotiated the refreshed ECRL deal, earlier announced that the rail project would continue at RM44 billion, one-third lower than the original cost of RM65.5 billion. The new negotiation, however, did not touch on other bilateral matters such as palm oil.

China is Malaysia’s third-largest export market for palm oil after India and the European Union. In March, the government revealed that China agreed to bump up its palm oil purchase by 50% to around 4.7 million tonnes.

Malaysia exported 3.07 million tonnes of palm oil and palm products worth a total of RM8.38 billion to China in 2018, up 7.3% from 2.86 million tonnes worth about RM9.39 billion in 2017.

“We don’t know how much China will buy, but if they do buy, it has to be at a competitive price. The big market in China is the Indonesian palm oil — the likes of Wilmar International Ltd and Musim Mas Holdings Pte Ltd.

“It has been the case because they can sell at a US$10 (RM41.37) to US$20 discount compared to Malaysian palm oil,” Chandran said.

Apart from palm oil, Chandran said Malaysia could also push for an agreement on natural rubber.

“The rubber tappers are worse off than our oil palm farmers. Perhaps, this is where we could have joint ventures with Chinese tyre companies. This is another area we can look at,” he said.

Plantation stocks on the local stock exchange remain depressed, despite positive developments in Putrajaya. The news on Monday failed to stimulate many plantation counters, with six of the top 10 stocks posting declines in the last three days. On market capitalisation, some RM10.33 billion have been wiped off from the top companies over the same period.

Counters like Sime Darby Plantation Bhd, Genting Plantations Bhd and United Plantations Bhd, Kuala Lumpur Kepong Bhd and FGV Holdings Bhd were down yesterday, reflecting the sombre mood of the sector.