It is high time for industry leaders to negotiate and discuss with EU to adopt most parts of MSPO in their due diligence exercise
by S BIRRUNTHA / pic MUHD AMIN NAHARUL
THE proposed ban on palm oil exports to the European Union (EU) may bring unexpected dire consequences to the industry, experts said.
Singapore-based Palm Oil Analytics owner and co-founder Dr Sathia Varqa said the main impact of the proposed ban will be on the income of smallholders, who will not be able to sell to the mills, who in turn cannot sell to refiners.
He added that this is because traders are not taking delivery from refineries and crushers to export to the EU.
“Indonesia imposed a blanket ban on all palm product exports in May in an attempt to shore up domestic supplies but this policy failed miserably after global crude palm oil (CPO) prices shot up while domestic Indonesian smallholders were not able to sell their fresh fruit bunches (FFBs) to the mills.
“Therefore, the impact will be felt from shareholders to smallholders,” he told The Malaysian Reserve (TMR).
Commenting further, Sathia said Malaysia, being the world’s second-biggest palm oil producer, is not in a weak position and has well-established and widely adopted Malaysian Sustainable Palm Oil (MSPO) standards.
He noted that the key is now for the palm oil industry leaders to negotiate and discuss with EU to adopt most parts of MSPO in their due diligence exercise to verify sustainably produced palm products.
Deputy Prime Minister Datuk Seri Fadillah Yusof recently said that Malaysia will formulate strategies with Indonesia for a mission to the EU to find out and give feedback on the bloc’s policy development on palm oil.
Fadillah, who is also the plantation and commodities minister, said the mission will put forth scientific facts, economic interests in a social context and estate practices applied in both countries.
“We will bring along representatives of smallholders to give our views,” he said in a press conference after meeting with Indonesia’s Coordinating Minister for Economic Affairs Airlangga Hartarto on Feb 9, 2023.
Malaysia has taken over the chair of the Council of Palm Oil Producing Countries (CPOPC) for 2023 from Indonesia.
According to Fadillah, Malaysia and Indonesia agree on preserving the environment, including sustainable logging when clearing land for plantations.
He added that both countries always strive to comply with regulations on the palm oil industry, but they must be fair and understand the situation in both countries where they try to help smallholders come out of poverty.
Additionally, the minister said CPOPC must help smallholders to comply with plantation regulations and enhance yields with the support of the government and the corporate sector.
Smallholders comprise 27% of plantations in Malaysia while in Indonesia it is at 40%.
Fadillah said CPOPC will also contact United Nations agencies so that the MSPO and the Indonesia Sustainable Palm Oil certifications are recognised not just in the EU, but globally.
Previously, in an interview with
Bloomberg, Fadillah said Malaysia is weighing a range of trade initiatives to strike back against the “unfair policies” from the EU that are blocking market access for palm oil.
He noted that Malaysia will coordinate its response with Indonesia, the largest edible oils supplier globally. Among the strategies include slowing commodities trade with Europe and reviewing imports from the bloc.
For the record, EU had previously agreed to a historic law in December that will stop products causing forest destruction from being sold in European shops and supermarkets.
Products such as wood, rubber, beef, leather, cocoa, coffee, palm oil and soy will not make it past the port unless proven to be deforestation-free.
Malaysia and Indonesia are leading international criticism of the policy.
Meanwhile, a plantation expert opined that this has been a long-standing issue since the 1990s, as the West is moving towards forestry that is sustainable and they do not appreciate plantations that destroy primary forests.
He added that if the ban happens, Malaysia will need to find alternative markets
“It is difficult for Malaysia to stop exporting to Europe because they are one of its biggest buyers.
“Which country in the world can absorb what Malaysia currently exports to Europe?
“While the government has taken a more assertive stance amid rising EU compliance regulations, we note that Malaysian palm oil suppliers are still keen to supply to the EU as it is a premium market,” the expert, who wished to remain anonymous, told TMR.
Therefore, he expressed that the proposed ban could have unintended consequences, especially in a competitive environment where Indonesia is gaining market share among the EU and large buyers.
Brighter Year Projected Despite Ongoing Issues
Malaysia’s palm oil industry is expected to continue its encouraging performance in 2023 supported by strong demand alongside higher CPO production.
According to Fadillah, palm oil exports are expected to increase by 3.7% to 16.3 million tonnes in 2023 compared to 15.72 million tonnes last year.
He said this follows the continuous demand for palm oil from importing countries such as the United Arab Emirates, Saudi Arabia, Japan, Bangladesh and Egypt.
The minister added that the increase in the area of mature oil palm plantations, especially in Peninsular Malaysia and Sarawak, as well as the good weather conditions are the factors that lead to an increase in CPO production this year.
“To continue to encourage this positive development, the ministry will also ensure that the entry process of foreign workers runs smoothly to address the problem of labour shortages in the plantation sector,” he said in a recent press briefing.
Echoing similar views, the Malaysian Palm Oil Board (MPOB) said the country’s palm oil industry is projected to remain resilient and competitive in 2023 driven by expected stronger demand for palm oil despite the risk of a global economic slowdown affecting world trade.
MPOB said the demand for palm oil exports to China, which is one of the largest importers of palm oil, is expected to be stronger this year, following the borders reopening and the setting of new economic targets for 2023 presented by the Chinese government earlier this year.
It noted that the outlook for the Malaysian palm industry is expected to be brighter this year, although the average price of CPO in 2023 is projected to be slightly lower than in 2022.
“The price of CPO in 2023 is expected to remain at a high momentum compared to previous years.
“The average price of CPO is projected to be between RM4,000 and RM4,200 per tonne in 2023 compared to RM5,087.50 per tonne in 2022,” it said in a recent report.
Meanwhile, MPOB also highlighted that the production of CPO is expected to increase to 19 million tonnes in 2023 as a result of measures to restore foreign workers and the expected increase in mature oil palm areas.
It added that the increase in CPO production is expected to stimulate the growth of exports of palm oil and palm-based products this year.
As such, CPO stocks are expected to decrease by 8.7% to two million tonnes in December 2023 compared to 2.19 million tonnes in December 2022 due to the expected increase in export demand, especially from major importing countries.
US Lifts Import Ban on SDP Products
On Feb 3, 2023, Sime Darby Plantation Bhd (SDP) was cleared of accusations of using forced labour by US authorities and permitted the importation of palm oil from SDP into the US.
SDP is an integrated plantation company with the largest oil palm planted area, and the largest CPO and certified sustainable palm oil producer in the world.
In a recent note, Moody’s Investors Service viewed that the modification of forced labour finding by the US Customs and Border Protection (CBP) is credit positive for SDP as it serves as an acknowledgement from an independent third party that the company’s products under scrutiny are no longer being produced with forced labour.
It added that this also removes the risk of further sanctions as a result of forced labour finding by the US CBP in January 2022, which could have led to a weakening in SDP’s credit quality if left unchecked.
“The finding will help to lower social environmental, social, and governance risks by improving SDP’s relationships with stakeholders, which otherwise might have considered restricting their ties with the company if the allegations of forced labour were not addressed and resolved,” Moody’s said.
Additionally, the rating agency noted that these restrictions could have included customers placing limitations on purchasing SDP’s products or lenders pulling funding because of sustainability policies that prevent lending to companies with alleged violations of international labour standards.
“The US CBP determination came on the back of SDP proactively engaging with its stakeholders and enhancing its labour practices, particularly over the past two years,” it said.
Meanwhile, Hong Leong Investment Bank Bhd (HLIB) Research viewed positively the latest development and reckoned that the impact on SDP (both in terms of earnings and its share price) will be minimal.
It said this is because the withhold release order had an insignificant impact on SDP’s earnings earlier, and its share price has run up by over 15% since October 2022.
As such, HLIB Research maintained its earnings forecasts and ‘Hold’ rating of the stock, with a target price of RM4.49, on an unchanged 18 times core earnings per share of 24.9 sen for the financial year ending Dec 31, 2024 (FY24).
Likewise, Maybank Investment Bank Bhd kept its ‘Hold’ rating on SDP, with an unchanged target price of RM4.38.
It said while SDP’s share has largely priced in this expectation, this is nonetheless an affirmation of the measures taken.
“We expect SDP to turn in better quarter-on-quarter (QoQ) core net profit of an estimated RM597 million for the fourth quarter of this year (4Q22) (+47% QoQ, down 10% year-on-year [YoY]), which would be on track to meet our/the consensus FY22 core net profit forecasts of RM2.271 billion/RM2.254 billion.
“The stronger QoQ performance would be driven by higher sales volume (especially in Papua New Guinea and Indonesia) owing to the huge inventory on its balance sheet as of end-September 2022, forward sales locked in earlier at a higher-than-expected CPO spot average selling price in 4Q22 and lower unit cost of production owing to a slowdown in manuring activities in 4Q22 due to wet weather.
“As for the reported 4Q22 fresh fruit bunch (FFB) output of 2.073 metric tonnes (MT) (down 2% YoY, down 4% QoQ), it was better than expected, lifting FY22 FFB output to 8.21 MT (down 10% YoY), which is at 103% of our forecast,” the research house said.
- This article first appeared in The Malaysian Reserve weekly print edition