Malaysia palm oil industry set to be hit by Indonesia’s duty cut, India’s pro-farmers move

But until the ministry makes its call, Malaysia’s producers look exposed, industry watchers say.

“[Indonesia’s] new levy coupled with the hike in India’s import taxes on edible oils could negatively affect Malaysia’s palm oil exports in the coming months as they could potentially lose some market share to their Indonesian counterparts,” local research house PublicInvest Research said in a client note on Friday.

Malaysian producers have seen narrowing margins as the increasing frequency of adverse weather events and a prolonged labour shortage nearly doubled production costs to up to 3,000 ringgit per tonne, according to the government.

Malaysia’s palm oil and palm oil-based exports totalled over US$21 billion in 2023, or nearly 3 per cent of Malaysia’s gross domestic product, according to government data.

The industry has long grappled with accusations of mass deforestation, the subject of a trade dispute between the Southeast Asian nation and the European Union.

Analysts say palm oil has lost its price competitiveness over the past month, trading higher against vegetable oils derived from soybean and sunflower seed, due to tight supply in Indonesia.

Indonesia’s Palm Oil Association and Palm Oil Board in August forecast the country’s 2024 output to be flat or fall by as much as 5 per cent to between 52 million and 53 million tonnes against last year’s record haul of 54.84 million tonnes.

“We maintain our view that the current high CPO [crude palm oil] price is not sustainable as a wider discount is needed to sustain demand,” said Ong Chee Ting, an analyst with the Maybank Investment Banking Group.

Sustained high prices of Malaysian CPO, which settled at 3,977 ringgit (US$915) at market close on Monday, combined with the spike in India’s vegetable oil import tax have pushed Indian traders to cancel about 100,000 tonnes of palm oil deliveries over the final three months of the year as they sought cheaper alternatives, according to a Reuters report.

Malaysia has called on the European Commission to delay implementation of the European Union Deforestation Regulation beyond the December 30 deadline. The palm oil lobby argues that the law, which will exclude unsustainably-sourced agriculture products from the European market, places unreasonable burdens that threaten to cut out smallholders of oil palm plantations “from the EU supply chain entirely”.

The regulation “disproportionately affects developing nations” where small farmers would struggle to meet operational and technical requirements laid out by the legislation, the Malaysian Palm Oil Council (MPOC) said.

“To address these issues, the EU must take immediate action by providing meaningful exemptions for smallholders to prevent their exclusion from global supply chains,” MPOC Chief Executive Belvinder Sron said in a statement last Thursday, adding that the Malaysian palm oil industry should qualify as facing “low risk” of deforestation.

Malaysia and Indonesia had filed separate complaints at the World Trade Organization (WTO) against the EU in 2021, arguing that the regulation was discriminatory towards palm oil producers after the European bloc decided that palm-based biodiesel should no longer be considered a renewable fuel.

The WTO in March rejected Malaysia’s complaint but instructed the EU to make adjustments to its policy.

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