Indonesian buy-in essential for greater export ban impact
19/01/2023 (Free Malaysia Today), Petaling Jaya - Deputy prime minister Fadillah Yusof’s threat to stop selling palm oil to the EU will have a greater impact if Indonesia cooperates, according to an economist.
Malaysian Institute of Economic Research non-resident senior fellow Geoffrey Williams said that if the world’s two largest producers of palm oil worked hand-in-hand, it would make the Europeans realise the importance of the commodity.
“They (the Europeans) might then review their approach and be more cooperative and friendly,” he told FMT Business. If that happens, Fadillah’s statement would not seem so impulsive after all.
Last Thursday Fadillah, who is also plantation and commodities minister, announced that the government was considering a proposal to stop exports to the EU because it says the bloc’s new regulation is an intentional trade barrier.
The EU had earlier proposed to make exporting countries meet requirements under its deforestation regulation, a move that Malaysia says is not economically responsible.
Europe accounts for about 10% of the global palm oil export market.
Analysts have noted that if Fadillah’s proposal is implemented, it would force the Europeans to seek supply from elsewhere or switch to other edible oils.
Williams said that while Malaysia could be effective by going it alone, working together with Indonesia would ensure a win for both.
“By unilaterally cutting supply to Europe, Malaysia could raise prices for EU users,” he added.
He said the approach proposed by Fadillah could be “very impactful”. “It will harm many EU companies in both the food and non-food sectors, and in the short-term may lead to changes in the restrictive policy,” he said.
“In the longer run, it would force EU companies to source for palm oil elsewhere or to switch to other types of oils. However, this is not easy or economically viable in many cases,” Williams said.
“These restrictions from the EU are politically motivated. They are a non-tariff barrier to trade aimed at protecting their domestic markets with very few environmental benefits,” he added.
The new EU requirements are not specifically targeted at palm oil or Malaysia. Generally, it circumvents international regulations to achieve its protectionist objectives.
Williams noted that the European ESG (environmental, social and governance) goals focused on environmental issues without considering the social impact on people working in the palm oil sector or the governance aspect.
“There is also very little evidence of environmental benefits from their restrictions,” he said.
He also pointed out that Malaysian palm oil producers could easily find new markets in Asia. China and India can potentially buy more, likewise the Middle East and Central Europe.
MIDF Amanah Investment Bank head of research Imran Yusof warned that Malaysia could end up competing with producers of vegetable oil or soybean oil if they choose to seek new markets in countries such as the US.
“The other oils may also contain the same refined additive and they would already have a strong customer position,” he told FMT Business.
Imran said palm oil would then be up against the same challenges as these other vegetable oils, especially in markets where there are barriers against refined products.
Sime Darby Plantation, one of the biggest producers of palm oil in Malaysia, told FMT Business that it is a multi-country operation, in both the upstream and downstream segments.
“We are able to move our products from Malaysia, Indonesia, Papua New Guinea and the Solomon Islands to various markets to capitalise on potential opportunities and withstand any challenging market conditions,” it said.
The EU accounted for 9.4% of Malaysia’s export volume in 2022 but exports have been declining since 2015.
Malaysia exported 1.47 million tonnes of palm oil to the EU in 2022, a drop of 10% from 2021, and a 40% decrease from the 2015 total of 2.43 million tonnes.
“The truth is that the EU is a shrinking market for palm oil,” Williams noted.