The Edge Markets (28/10/2019) - KUALA LUMPUR (Oct 28): World's dominant palm oil producers, Indonesia and Malaysia contribute 87% of the global supply -- creating a duopoly market of the most versatile edible oil.
Indonesia produces 33 million tonnes of the commodity annually, while Malaysia 19.5 million tonnes. Other players are Thailand, Columbia and Nigeria.
Palm oil contributes approximately one-fifth of the world's production of oils and fats.
It is also the most affordable edible oil in the market, making it a much sought after commodity, giving both Malaysia and Indonesia the upper hand in the industry.
Putrajaya and Jakarta can actually collude on prices or output, a practice that is banned by the US Antitrust Law, said an industry veteran.
Such practice can result in consumers having to pay higher prices than they would in a truly competitive market.
Here, it is a free market, whereby under the rule of engagement of two suppliers, consumers will try to seek after the raw material from both sides and by doing this, they can compete to buy at the best price.
“But if you choose to buy from only one market, first of all you lose bargaining power," he said, adding that the particular market would also have to scramble to supply more palm oil.
“And in the case of the Indian trade body’s call for its members to refrain from importing Malaysian palm oil and instead buy more from Indonesia, it will require Indonesia to export 15,000 tonnes extra palm oil (one more shipload) everyday,” said the veteran who requested anonymity.
Mumbai-based Solvent Extractors' Association of India, which represents oilseed crushers, had recently advised its members to stop buying palm oil from Malaysia in protest against Prime Minister Tun Dr Mahathir Mohamad’s criticism of New Delhi for its actions in Indian-administered Kashmir.
One should also be mindful that both Malaysia and Indonesia are going full force on their respective bio-diesel programme to manage their respective stocks.
Malaysia is set to implement its 20% bio-content or B20 biodiesel programme, which is expected to boost the domestic demand for palm oil to 500,000 tonnes per annum.
Indonesia is also set to implement its B30 programme by early January 2020 to increase domestic palm oil consumption, as well as reduce energy imports.
The move will lift the country's total biodiesel output about eight million next year.
Jakarta currently has a mandatory B20 programme and aims for B50 by 2021.
As long as the world population continues to increase, the demand for palm oil will always be there.
The industry veteran said there will always be new markets to explore and new downstream products to be produced, given the innovation and research and development conducted in the country.
Meanwhile, Parti Pribumi Bersatu Malaysia strategist Dr Rais Hussin, in a letter to The Star, said much of Indonesia's palm oil is owned and sold by the likes of Malaysian companies.
He raised a valid question — whether India would then buy palm oil from Indonesia without Malaysian equity and partnership.
Until now, the call to restrict Malaysian palm oil purchase came merely from traders, and Putrajaya has not received any official note on the matter from New Delhi.
And therefore, Malaysia has not brought it up with the World Trade Organisation.
Malaysia, nevertheless, has the right to seek legal redress if India were to breach the Malaysia–India Comprehensive Economic Cooperation Agreement (MICECA).
The fact is, none benefits from a trade war or anything along that line.
The current spat between the United States and China is clear example of how it has fractured the global value chain.
The Tamil Nadu Congress Committee (TNCC) has voiced concern that reduction of palm oil imports from Malaysia by India would hit the migrant workers from the southern Indian state of Tamil Nadu who are currently employed in Malaysia is one example of the potential implications.
“At least 500,000 people from Tamil Nadu are working in the information technology sector and restaurants in Malaysia.
“They also send almost 90 per cent of their wages to their families living in India,” TNCC president KS Alagiri said.
According to the World Bank, India tops the global list of remittance recipients, with US$79 billion (RM331 billion) last year, mainly from the Gulf nations.
Malaysia ranks in the top 20 with an average remittance of RM2 billion annually for the past three years.
Hence, in a globalised economy where migration is norm and industries have partnerships in multiple countries, it is difficult to have such trade restrictions without equal disadvantages. — Bernama
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