Palm oil industry gathers in shadow of India-Malaysia trade spat

Indian buyers have started switching to Indonesia over worries the govt may restrict or hike taxes on Malaysian imports

By BLOOMBERG / Pic By BLOOMBERG

SOME of the world’s most influential palm oil traders, analysts and plantation executives will meet this week on the tropical island of Bali, Indonesia. In the limelight is the implementation of Indonesia’s ambitious biodiesel mandate as well as a brewing trade spat between No 2 supplier Malaysia and the world’s top palm oil importer India.

The Indonesian palm oil conference, which will be held between Oct 30 and Nov 1, features price forecasts from veteran analysts Godrej International Ltd director Dorab Mistry, LMC International Ltd chairman James Fry and Oil World ED Thomas Mielke.

Here are the key things to watch:

1. India-Malaysia Trade Spat
Asia’s latest trade spat is dividing palm oil giants in the region and keeping investors on edge. It started when Malaysia’s Prime Minister Tun Dr Mahathir Mohamad criticised India’s policy in Kashmir, triggering a backlash which led to an influential processors’ group in Mumbai calling on its members to avoid buying Malaysian palm oil.

Indian buyers have started switching to Indonesia over worries the government may restrict or hike taxes on Malaysian imports.

Any action by India to curb palm oil from Malaysia could depress prices and hurt incomes of farmers and smaller plantation firms. Palm oil is Malaysia’s biggest agricultural export and India is its top customer — India’s purchases more than doubled between January and September from a year earlier.

There doesn’t seem to be a resolution in sight as New Delhi has not publicly commented and Dr Mahathir said he won’t retract his comments about Kashmir. Primary Industries Minister Teresa Kok has rebuked the Indian processors’ group for advising members to shun palm oil, while International Trade and Industry Minister Datuk Darell Leiking will seek to engage with India to resolve the spat.

2. Biodiesel Watch
Indonesia will roll out its B30 biodiesel (30% bio-content) mandate starting Jan 1 and the industry is closely watching whether the top grower can fully implement the higher blend that’s anticipated to boost palm consumption and support prices.

Industry analysts and investors predicting that palm oil prices will rise in the first quarter are banking on Indonesia to soak up nearly 10 million tonnes of palm for biofuel.

The country’s infrastructure capability, however, is still in question and the pace of the B30 programme will be a “price mover” in coming months, according to Oscar Tjakra, senior analyst for grains and oilseeds at Rabobank.

In Malaysia, the mandate will be doubled to B20 in the transport sector and is expected to lift consumption to 1.3 million tonnes a year.

3. US-China Trade War
While palm oil isn’t directly involved in the trade war between the world’s two largest economies, it’s not completely isolated either. The protracted spat has roiled commodity markets and clouded the outlook of global economic growth, which could impact consumption of edible oils.

Chinese tariffs on US imports have constrained supplies of soybeans and soybean oil in the country, boosting demand for palm oil.

That could reverse if the trade conflict is resolved.

“Demand from India and China will fluctuate due to several factors like the trade war between the US and China, but demand from those two big buyers will keep increasing,” according to Derom Bangun, chairman of the Indonesian Palm Oil Board.

4. European Palm Curbs, Sustainability
The conference comes hot on the heels of controversy surrounding the palm oil industry after haze from burning Indonesian forests choked South-East Asia only a few weeks ago. The Council of Palm Oil Producing Countries said oil palm plantations are generally not the source of burning, but that hasn’t allayed accusations that some farmers still use illegal slash-andburn techniques to clear land for crops.

Indonesian authorities have named more than 200 companies including oil palm, pulp producers and individual farmers as responsible for starting the fires.

That’s fuelling momentum for anti-palm oil campaigns and for the European Union (EU) to curb its palm oil purchases on environmental grounds. The most pressing is the Delegated Act that seeks to phase out palm-oil based biofuel by 2030 — which both Malaysia and Indonesia are challenging through the World Trade Organisation.

Now there’re fears the EU may limit palm oil in food. Malaysia said the EU’s cap on glycidyl esters and its proposed limits on three-monochloropropane diol esters may impact palm oil consumption in food products, and that the industry must be ready to anticipate challenges to “trade impediments” from the bloc.

5. Productivity
A nagging worry on the minds of growers is production. Faced with scarce land and labour, yield growth has stagnated in recent years especially from Malaysia, and the industry wants to know how this will affect the long-term outlook.

This year’s conference will highlight government policies on palm oil as the sector grapples with an increasingly complex business environment.

“Productivity is not increasing as fast as we want,” said Kanya Lakshmi Sidarta, secretary general of Indonesian Palm Oil Association, known as Gapki. “Production is showing signs of plateauing because there has not been land expansion and there is permit moratorium in place,” she said. — Bloomberg

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