Let cool heads prevail

Palm oil industry has taken up substantial media space, but investor sentiment towards plantation companies remains fairly good


MALAYSIA’S palm oil industry is in the news again. The call by the Mumbai-based Solvent Extractors Association (SEA) to its members to cease importing refined palm oil from Malaysia on the back of the social media #BoycottMalaysia campaign on Twitter is a new headache the industry could do without.

The European Union’s plan to cut the use of palm oil in the production of biodiesel would be bad for the industry, but a cut in purchases by India would be far more damaging to the local industry as the country has been the largest buyer of refined palm oil this year, taking some four million tonnes to date.

Although the issue has taken up substantial media space, investor sentiment, oddly towards plantation companies listed on Bursa Malaysia, has remained fairly good.

The smart money is suggesting that the issue will blow over. The answer to that is likely based on the fact that the nationalistic position of the SEA is for now just noise and not a policy stand in New Delhi.

However, the potential of it blowing up into trade spat is real, and it requires some cool heads as both countries stand to lose much.

Although many Indians feel offended with Prime Minister Tun Dr Mahathir Mohamad’s position on Jammu and Kashmir issue, the benefit of sustained trade and investment, as well as people to people contact must prevail over some of the differences that may arise from time to time.

Cutting imports of refined palm oil from Malaysia is, at the heart of the matter, not an economically wise decision to make for India as palm oil remains the cheapest edible oil in the global market, and available mainly from Indonesia and Malaysia that are within a relatively short distance to meet the country’s growing demand for edible oil imports.

And with acreage under palm oil and yields set to rise, total production in the market will keep the commodity relatively cheaper compared to substitutes like soy oil, which Indian traders will have to import all the way from major producers like Brazil, Argentina or the US.

The quality of Malaysian palm oil products is another factor for buyers. Those who are making the noise probably have not considered the goodwill and trust built over time between buyers and sellers in the industry which had also been sealed with binding contracts.

Breaking the contracts will be a problem for both parties and it would take some time to nurture the relationship again.

Even if some Indian importers do heed the call by the SEA and look to market like Indonesia for increased supplies, they will very likely deal with Malaysian-based companies like Sime Darby Plantation Bhd, IOI Corp Bhd, United Plantations Bhd and Kuala Lumpur Kepong Bhd, who have a sizeable plantations and production capacity in the country.

This would probably also explain why investors remain interested in the companies, and palm oil futures contract prices on the Bursa Malaysia Derivatives Bhd continue to gain.

The bigger problem for both countries is the spat could go on to impact sectors like tourism, construction, manufacturing, information technology, energy, food, healthcare, aviation, banking and finance.

That would be far more difficult to pull back from.

Bhupinder Singh is the corporate desk editor at The Malaysian Reserve.