By Charles F. Moreira, Editor
A Bernama report on 15 January 2020 may provide relief for Malaysia’s crude palm oil (CPO) and oil palm fresh fruit bunch (FFB) producers.
Standard Chartered, ASEAN and South Asia Global Research chief economist Edward Lee had told Bernama that Malaysia’s exports of refined palm oil to India was roughly worth US$300 million (RM1.22 billion) a year, which is relatively small and will have a minimal impact on Malaysia.
“In the end, India has to buy it from somewhere and essentially if the ban is strictly enforced they will be buying at higher prices,” said Lee.
Earlier, in response to reports of India restriction on refined palm oil imports, Primary Industries Minister Y.B. Puan Teresa Kok dismissed reports that India had called for a restriction on Malaysian palm oil.
“What boycott. They (India) just want us (Malaysia) to export more crude palm oil and reduce the export of refined palm oil,” she told reporters during a dialogue session with Selangor oil palm growers in Kuala Selangor recently.
Hopefully both Lee and Kok are right. Since CPO is not included in India’s restriction, Malaysia could possibly make up for that RM1.22 billion per year loss in refined palm oil sales to India with increased sales of CPO but then again, Malaysia would be competing with Indonesia which has been exporting mostly CPO to India.
Moreover, it would also depend upon the sentiments of Malaysia’s CPO customers in India over the comments about India’s policies on Kashmir and the more recently the Citizenship (Amendment) Act and how many of them would prefer to buy CPO from countries other than Malaysia.
As we wrote in our first article on this issue – Will Tun M’s Criticism of India’s Citizenship Bill Impact Msia-India Trade?, on 9 January 2020, that following Malaysian prime Minister Tun Dr. Mahathir’s comments on Jammu and Kashmir, in October 2019, the vegetable oil industry and trade association – the Solvent Extractors’ Association of India (SEAI) had called upon its 875 members – “In your own interest as well as a mark of solidarity with our nation, we should avoid purchases from Malaysia for the time being. We trust you will heed our advice.”
So whilst members of industry bodies such as the SEAI will still buy imported CPO for further processing into refined palm oil products, however how many of them will break ranks and buy CPO from Malaysia, since that call for solidarity with their nation was made before India restricted imports of refined palm oil?
According to the Malaysian Palm Oil Board (MPOB), India was Malaysia’s largest buyer, having bought 4,409,511 tonnes of palm oil in 2019, or 23.87% of the 18,469,258 tonnes exported worldwide that year and at an average price of RM2,119 per tonne in 2019 according to the MPOB, that works out at RM 9.3 billion in sales of palm oil to India in 2019.
Whilst Malaysia exports palm oil to almost every country worldwide, other major buyers of Malaysian palm oil in 2019 were in order China (2,490,503 tonnes), Pakistan (1,085,546 tonnes), Netherlands (880,813 tonnes), Turkey (709,262 tonnes), Philippines (629,086 tonnes), Vietnam (595,265 tonnes), United States of America (542,161 tonnes), Iran (521,669 tonnes), Japan (498,359 tonnes) and the rest of the world (6,107,083 tonnes).
Looking at the MPOB’s figures of palm oil exports to the major buying countries above, sales to India increased dramatically from 2,514,008 tonnes in 2018 to 4,409,511 tonnes in 2019 and sales to China increased from 1,859,748 tonnes in 2018 to 2,490,503 tonnes in 2019, whilst sales to Vietnam increased by 133,698 tonnes between those two years, to Turkey was up by 77,375 tonnes, to Japan was up by 39,737 tonnes, to Iran up by 33,746 tonnes and to the United States of America up by1,601 tonnes.
On the other hand, amongst these major importing countries, sales to Pakistan decline by 75,732 tonnes, to Philippines down 60,204 tonnes and to Netherlands down 31,780 tonnes.
So according to figures provided by Standard Chartered’s Lee, sales of refined palm oil to India would amount to 13.11% of that RM9.3 billion, so he could be right that India’s restriction of refined palm oil imports will not impact Malaysia all that much, especially if there are increased purchases of Malaysian palm oil, especially CPO from India, China and other major importing countries in 2020.
However, if national sentiment amongst buyers in India is strong enough against Malaysian palm oil, it may be difficult for Malaysia to make up the loss.
For instance, Free Malaysia Today of 11 December 2019 reported that imports of palm oil by India contracted by 60% in October following its import tax hike (from 45% to 50%) on refined palm oil from Malaysia.
However, the article did not mention the role which buyers’ sentiment could have had in that drop.
On a roller coaster
Meanwhile, the price of crude palm oil (CPO) on the Malaysian Palm Oil Board’s (MPOB’s) website went through a roller coaster ride following news broke on 8 January 2020 about India’s announcement that it would restrict or ban imports of refined palm oil.
The CPO price fell RM18, from RM3,061.50 per tonne on 7 January to RM3,043.50 on 8 January, bounced back higher to RM3,084.50 on 9 January, higher still to RM3,111.00 on 10 January and after the weekend break dropped to RM3,093.00 on 13 January and fell further to RM3,033.00 per tonne on 14 January (the latest quoted so far) and RM10.50 below the 7 January price dip.
At the same time, daily references prices per tonne of oil palm fresh fruit bunches (FFB) at the palm oil mill gate on the MPOB’s website, dropped consecutively between 13 and 15 January 2020 for all three A, B and C palm fruit grades across Malaysia’s six regions – namely Northern, Central, Southern, East Coast, Sabah and Sarawak.
However FFB prices hardly moved between 7 and 8 January, with prices remaining the same for most grades across all regions, with the exception of RM1.00 per tonne drop in some grades in some regions, and most of these prices bounced back by RM3.00 and by RM4.00 for a grade in one region.
FFB reference prices per tonne as raw material inputs to palm oil mill gate tend to be roughly one-fifth of price of the CPO which comes out of the mill. The MPOB updates its reference FFB prices around 12 noon each day besides Saturdays, Sundays and public holidays, though its updates of CPO prices tend to be delayed.
Now this drop in CPO price on 14 January, below that on 7 January raises questions as to whether this indicates a long-term downtrend in the CPO price or whether the roller coaster the CPO price went through over the past eight days is just the result of a knee-jerk market reaction to India’s announcement, followed by a transient interplay of contention of speculative buy and sell forces acting on the market price of the commodity.
After all, whilst some buy CPO on world markets to use in further processing, others are speculators who buy the commodity in the hope of making a profit when they sell, much like investors and traders do on stock markets, where such wild price swings in stocks of related listed companies are typical in cases of unforeseen events such as when Houti drones attacked two major Saudi Aramco oil installations on 14 September 2019, thus disrupting five million barrels per day of crude oil production and about five percent of the world’s oil supply.
Stock prices of oil & gas production as well as oil & gas related companies on Bursa Malaysia shot up the following trading day, which was on Tuesday 17 September 2019 after the 16 September Malaysia Day holiday.
For instance, the share price of oil exploration and production company Hibiscus Petroleum shot up from a close of 95.5 sen on Friday 13 September 2019 to open at RM1.03 on the morning of 17 September and closed at RM1.02 that evening.
This spike in share price would likely have been due to transient speculative buy and sell forces which bought its shares expecting its price to rise in tandem with the spike in the price of crude oil which happened and then sell to lock in their profit, and this can be seen in the movement of its share price from the following day onwards.
As it turned out, Hibiscus’ share price opened down at RM1.00 on 18 September morning and closed down at 99.5 sen that evening and then it closed lower each subsequent evening until 24 September evening when it closed at 94.5 sen, or 1 sen below its 13 September close. Hibiscus’ share price closed up at 95.0 sen the following evening and then continued to move sideways in normal market price fashion after that until 31 December 2019, after which it rallied briefly due to some other price catalyst and then pulled back.
The share price of oil & gas related FPSO (floating production storage and offloading) services company Bumi Armada opened up at 32.0 sen on the morning of 17 September 2019 from a close of 30.5 sen on 13 September, and closed at 31.5 sen on 17 September evening, after which it opened down at 31.0 sen on 18 September morning, closed back at 31.5 sen that day, closed up at 34.5 sen on 19 September evening, went sideways and went on a bull run from a close of 31.0 sen on 2 October to a close of 54.5 sen on 20 November 2019.
On the other hand, the share price of Serba Dinamik Holdings which provides operations and maintenance (O&M), and engineering, procurement, construction and commissioning (EPCC), IT solutions and education & training services to oil & gas companies was unaffected by news of the drone attack on the Saudi facility, since its revenue stream is not immediately dependent on oil & gas exploration, production and sales, though for other reasons, its share price went on a bull run from 23 December 2019 to 3 January 2020.
Whilst the effect of the Houti drone attack on the Saudi Aramco oil facilities had the opposite effect on share prices of oil & gas companies as India’s restriction on the imports of refined palm oil had on CPO and later FFB prices, however the question remains as to whether the prices of CPO and FFB in Malaysia will soon resume their regular uptrend since mid-2019 after this minor disturbance which has rocked the proverbial boat, or whether the uptrend will reverse into a downtrend.
We’ll just have to stay tuned to CPO and FFB price movements to know.