India ban on M’sian palm oil not economically sustainable

With Indonesia’s biodiesel mandate, the output would be insufficient to serve India’s demand

by SHAHEERA AZNAM SHAH / pic by MUHD AMIN NAHARUL

INDIA’S move to shun palm oil from Malaysia will have a negative impact on the former’s economy, as global production of the commodity is expected to remain tight with Indonesia’s higher usage of biofuel and the price rise of alternative edible oils.

Global palm oil consumption is estimated to have reached almost 76 million tonnes last year, reducing excess of the commodity and driving up prices.

But Indonesia’s decision to implement B30 for its green fuel would further tighten supply, while prices of palm oil replacements, like rapeseed and soybean, are on the rise due to their tight supply.

There were sporadic reports of India’s ban on Malaysia’s palm oil in retaliation over Prime Minister Tun Dr Mahathir Mohamad’s remarks on Kashmir and the new Indian citizenship law.

Such ban would force Indian buyers to opt for Indonesia for palm oil imports, although the most populous Islamic country is already expanding its green fuel to B30, tightening export supplies.

Rapeseed oil like palm oil had risen, trading at €392.25 (RM1,795) yesterday, lower than the peak of €421.75 on Jan 9, 2020. Soybean, which is also facing a tight supply, was traded at US$8.84 (RM36.69) yesterday from a 52-week low of US$7.81.

Industry consultant MR Chandran said based on Indonesia’s production trend coupled with its biodiesel mandate, the output would be insufficient to serve India’s demand if the latter stop importing from Malaysia.

“The Indian importers are not buying from Malaysia (but) it can only be temporary because Indonesia is not able to supply the entire demand of India as (Indonesia’s) supply this year will be down.

“On top of that, they have the B30 biodiesel programme and they also want to export to other countries, such as China and the European market. They will not have sufficient quantity to export.

“If Indonesia’s production can increase by three million tonnes, that will be a different story, but that is not the case. I think their crops will see flat growth, the same as last year,” he told The Malaysian Reserve.

Prices of palm oil and other edible oils have tumbled in the last two weeks as demands for major users like China are expected to drop due to the coronavirus outbreak.

Consumption of palm oil, the most used vegetable oil in the world, is expected to face production challenges.

Chandran said global palm oil production, particularly from Indonesia and Malaysia, is expected to ease this year due to the cyclical weather conditions, lack of fertiliser input and shortage of labour.

“At the moment, Indonesia is capitalising on India’s withdrawal from Malaysia, but the trend is that there will be a huge supply constraint this year both from Malaysia and Indonesia.

“The increment of Indonesia’s production is between two million and 2.5 million tonnes annually. But for this year, they are lucky if they could produce one million tonnes increase,” Chandran said.

As Indonesia is charging a premium for its palm oil due to the supply constraint, Chandran said India could not manage to sustain the additional charges as the country’s economy has shown to be a price-sensitive market. “Indonesia is now charging a premium to India. If you take a benchmark figure, Indonesia is charging anything up to US$15 and US$20 per tonne.

“India is a price-sensitive market, hence, they could not afford the premium charges. Thus, their ban on Malaysian palm oil is predicted to be a short-term measure as India eventually has little choice, but to come back to the Malaysian market,” he said.

Reuters reported that Indonesian sellers are currently charging a premium around US$25 per tonne over the supplies from Malaysia after India shifted its entire purchase to Indonesia.

India purchased 4.4 million tonnes of Malaysian palm oil last year, with average monthly imports of 367,459 tonnes, according to the Malaysian Palm Oil Board data.

Indonesia is the world’s largest producer of palm oil, followed by Malaysia. Palm oil accounts for about two-thirds of India’s total edible oil imports.

In 2020, it is reported that India requires between nine million tonnes and 9.5 million tonnes of palm oil, sourcing mainly from Indonesia and Malaysia.

In January, Malaysia’s shipment to India halved compared to December last year. According to data from independent cargo surveyor SGS Malaysia Sdn Bhd, palm oil export to India fell 54.9% month-on-month to 40,400 tonnes for the period between Jan 1 and Jan 31.