The Hindu Business Line : Malaysian palm oil exports to EU: The currency effect

THE dynamic foreign exchange market touches every sphere of economic activity and much of a country's competitiveness is influenced by the underlying currency movements which, in turn, is not only influenced by policies but also by the economic developments in the trading partners.

The European Union seems to be at a disadvantage from the recent currency movements. The EU, which imports around two million tonnes of palm oil every year from Malaysia, is one of the major buyers. Its share in Malaysian palm oil exports stood at around 18 per cent (Figure 1) thus forming an important market, after China and along with India.

At the same time, the imports levels of the EU since last five years has increased significantly from Malaysia from around 1.5 million tonnes in 1998 to 2.17 million tonnes, at the annualised growth rate of 7.63 per cent versus Malaysian palm oil export growth rate of 7.4 per cent during the same period. Figure 2 gives the trends in imports.

Setback in demand owing to currency movements

Though the demand for edible oil in the EU has not changed as such, at the outset, it may in the coming period due to major changes in currency movements. The recent appreciation of the dollar against the major currencies, as reflected in the dollar index movement (a weighted index against the major currencies — euro, yen, pound sterling, Canadian dollar, Swedish kroner and Swiss franc) by 6.82 per cent from February second week to April third week, would leave the palm oil buyers at the EU to spend more. During the same period, the dollar strengthened against the euro from 1.2691 to 1.1821 from the week ending February 13 to the week ending April 23 by nearly 6.855 per cent (see chart).

This means that palm oil prices for the European buyer has become dearer by nearly 6.85 per cent even if it did not actually go up in the same period.

In simple terms, when RBD palmolein, f.o.b. Malaysian port, was quoted at $530 for the week ending February 13, 2004, would have been euro 417 a tonne.

The same for the week ending April 23, would have increased to euro 448 (7.4 per cent increase in value) even if palm oil prices were quoted the same at $530, due to currency movements.

What if palm oil prices increased during the same period, which was actually the case with the RBD palmolein f.o.b. rising to $535 per tonne for the week ending April 23? Though for Malaysians the increase was only 1 per cent during the period, for Europeans it would have been 7 per cent-plus because of the unfavourable currency movements.

In reality no impact for European buyer

However, this impact of currency appreciation is absorbed to some extent by a lower increase in palm oil prices, quoted on c.i.f. basis. This is evident from Figure 2, which depicts the Malaysian crude palm oil price trends from February to date on f.o.b. and c.i.f. Rotterdam basis along with spread. The spread has declined from around $40 to $24 per tonne, which means much of the currency appreciation is cushioned by relatively less increase in the c.i.f.value of palm oil. That is the efficiency in the market.

However, it also indicates that palm oil exporters to Europe have to keep a close eye on currency movements. As per the seasonality, palm oil imports from Malaysia to the EU remain at a slow pace in the second quarter of a year and would only surge in the last — in October-December. Thus, the import demand from the EU may be on a decline if the current trend of dollar appreciation persists.This isreally a cause for concern for Malaysia which is entering into higher production months. Also, the demand from India is already in question this season.

(Mr Krishna is chief consultant and Mr Soma Sekhar is edible oils analyst at TransGraph Consulting Pvt Limited. They can be reached at info@transgraph.com)

More Stories on : Oilseeds & Edible Oil | Forex

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Market is no real guide

All's not well on the farm front

US economy: Contradictory signals

Doomed or still recoverable?

Coalitions and economic stability — The great disconnect

Cooperative banks

Malaysian palm oil exports to EU: The currency effect

Empowerment of women: Emerging opportunities and potential threats

Electoral reforms

Civil services