Palm oil facing headwinds from the West

G Chandrashekhar | Updated on March 28, 2019 Published on March 28, 2019

A slippery market ahead   -  Bloomberg

Major producers Indonesia and Malaysia would do well to engage more with large importers India and China

The palm oil sector is currently facing a double whammy — softening prices in the wake of rising production and inventory, and concerted attack from West-based environmentalists for large-scale deforestation.

Recently, the European Commission (EC) concluded that palm oil as a transport fuel must be phased out as the commodity’s cultivation is seen causing excessive deforestation. In many countries, including Europe, palm oil is converted into bio-diesel and blended with mineral diesel in an attempt to promote renewable fuel as an alternative to mineral oil.

The European Union is now set to decide whether or not to accept and act upon the EC’s findings. This latest development in Europe is widely seen as posing a daunting challenge for two of the principal producers of palm oil — Indonesia and Malaysia.

Some 30 years ago, palm oil was attacked by a rival lobby — widely believed to be the soya lobby — calling it a ‘saturated oil’. It took enormous effort, in terms of human, technical and financial resources, to disabuse the minds of people.

In the second round playing out now, attacks on palm oil have been gathering pace in recent years, especially in Europe. There is a campaign for ‘palm oil free’ certification in the food market. ‘Palm-free food’ label has found some resonance among consumers because of consistent campaign against the oil.

What’s more, even third party pressure through lending institutions and investors is being mounted for production of ‘responsible palm oil ‘. The progress in certification of ‘sustainable palm oil’ has been slow. All these act as headwinds for the palm oil market.

With annual output in excess of 70 million tonnes, palm oil is by far the largest contributor to the vegetable oil pool, accounting for a third of the world’s vegetable oil production. At about 55 million tonnes, soybean oil — palm’s nearest competitor — accounts for about a fourth of world production.

To be sure, over the last decade and half, palm oil has decisively overtaken soybean oil in terms of both production and trade globally. Interestingly, the market for these two oils actually feed on each other, and the price of one impacts the price of the other.

However, more often than not, palm oil has traded at a discount of $70-150 a tonne to soybean oil, making the former an attractive proposition for large importing and consuming countries such as India and China.

Notwithstanding allegations — some real, some wild — the importance of palm oil to the global vegetable oil market cannot be wished away. It is the most productive in terms of oil per hectare of cultivation.

Importantly, the world is rapidly moving from synthetics to naturals. Consumers demand ‘natural’, ‘green’, ‘renewable’ and ‘biodegradable’ products. The United Nations’ Sustainable Development Goals are seen as a big boost for commodities such as palm oil.

Way ahead

Stung by the pressure from Europe, the two principal producers, Indonesia and Malaysia, now follow a two-pronged strategy — counter wild allegations against palm oil with adequate data and promote the use of palm oil as a bio-fuel domestically. For instance, Indonesia has announced an ambitious plan to vigorously promote the use of palm-based bio-diesel within the country.

Another option that the two producing countries ought to explore is to engage constructively with large importing nations such as India and China. Unfortunately, both Malaysia and Indonesia have been treating India merely as a large market for supply of palm oil in bulk. India has been importing palm oil from Malaysia for at least 40 years now.

Policy-makers in the supplying nations must realise that by nature commodity markets are fickle, and no market can be taken for granted. It would be in the fitness of things for Malaysia and Indonesia to go beyond commodity palm oil and strike partnership with India and China for a sustained, trust-based two-way relationship.

To start with, the issue of huge trade deficit that India faces with the two supplier nations could be addressed in a manner that works for both. To be sure, India annually imports close to nine million tonnes of palm oil valued at about $5.5 billion (about ₹40,000 crore) from the two countries.

There are areas in which Malaysia can engage with India in addressing some critical issues such as nutrition security. It will be in the interest of the two palm-oil producing nations to forge a stronger Asian alliance to expand demand as part of response to countering attacks from Europe.

The author is a policy commentator and agribusiness specialist. The views are personal.

Published on March 28, 2019
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