According to Oxford Business Group, a national drive to reduce the oversupply of palm oil in Malaysia, the world’s second-largest producer, is expected to bring greater market stability, supported by government incentives and trade controls.
Climbing stockpile
According to data from the Malaysian Palm Oil Board (MPOB), palm oil stocks rose by 2.63m tonnes in September, up 5.46% over the previous month, a thee-year high. Crude palm oil holdings increased by 6.68% month-on-month to 1.56m tonnes, with processed oil stocks up by a more modest 3.74% to just over 1m tonnes, the board said in a statement in mid-October.
Stockpiles rose despite export growth in September, with overseas shipments reaching 1.68m tonnes, up from 1.61m in August, and biodiesel exports nearly doubling to 31,400 tonnes.
Officials have warned that further increases in stock would likely depress prices, with many market analysts monitoring Malaysian palm oil reserves as an indicator of future prices.
“If we don’t do anything now, it is expected that palm oil inventory would exceed 3m tonnes by November,” Amar Douglas Uggah Embas, minister of plantation industries and commodities, told local media in early October. “If it reaches that level, prices will likely come down,” he added.
This could have a significant impact on the country’s economy. Crude and processed palm oil accounted for 6.1% of total exports last year, according to figures from the Malaysian External Trade Development Corporation, generating RM47bn ($11.3bn) worth of revenue.
Incentives & trade controls
In a bid to shore up prices, the Malaysian authorities have pledged to halt the rise in stockpiles and curb the surplus to a more manageable 2m tonnes through a series of incentives and trade controls.
One such programme is a RM100m ($24m) scheme by the MPOB to encourages growers to replace old, low-yielding oil palms with new saplings on some 83,000 ha of plantations.
The initiative, which went into effect on October 1, will provide financial assistance for growers though the end of the year, with incentives of RM1000-1500 ($240-260) per ha, according to the Ministry of Plantation Industries and Commodities. The programme is expected to curb production by around 250,000 tonnes in the short term.
A second measure, also announced in early October, involves fast-tracking the launch of B10 biodiesel production. While an emphasis on the production of B10 – which is 10% palm oil and 90% diesel – could help boost demand for domestic palm oil, broader uptake could be limited by lower fossil fuel prices.
Meanwhile, on the trade side, the Malaysian government has pledged to control the flow of imported palm oil to help encourage greater use of domestic output. Malaysia imported around 66,000 tonnes of crude palm oil in August alone – equivalent to roughly 3% of its monthly domestic production – most of which came from Indonesia.
Additionally, Malaysia announced in October that it will maintain an export tax of 0% on crude palm oil – given that the price remains above RM2175 ($521) per tonne – for the seventh straight month in a bid to make Malaysian palm oil more competitive.
Demand upside
The replanting initiative in particular is seen as a fairly sustainable approach, as it will reduce production in the short term while still creating higher-yielding crops as the new oil palms mature, allowing growers to take advantage of expected increases in global demand further down the line.
In June the US Food and Drug Administration announced that food manufacturers had three years to remove harmful trans fats from their products. The move is expected to generate greater demand for replacement oils such as palm in the coming years, buoyed by the prospect of greater market access thanks to the recently agreed Trans-Pacific Partnership trade deal.
Changjian Ji, tropical oils merchant at US-based palm oil supplier Cargill, told industry press in September that palm oil is seen the number-one replacement for partially hydrogenated oils.
Regional cooperation
Given the ongoing volatility in palm oil prices, Indonesia and Malaysia – which together account for 85% of global palm oil supply, according to the Malaysia Palm Oil Council – could be looking to work together to promote greater market stability.
According to local press reports, in early October Indonesian President Joko Widodo and Malaysian Prime Minister Najib Razak agreed to spearhead the creation of an intergovernmental Council of Palm Oil Producing Countries (CPOPC), which could help regulate the oil’s production, stocks and prices.
The price of Malaysian palm oil has experienced a high degree of volatility of late, up 20% month-on-month in September after hitting a six-and-a-half-year low of RM1863 ($446) per tonne in August. The price swing has been exacerbated by the weaker ringgit, which was trading its the lowest value against the US dollar since 1998 in late September.
The CPOPC is expected to benefit the wider palm oil industry, the Malaysian Institute of Economic Research noted, helping to standardise efforts to promote environmental sustainability and reduce industry uncertainty.
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