Palm Oil “War”: A Self-Inflicted Wound?

As expected, India retaliated. Indian refiners have stopped buying Malaysian palm oil for shipments in November and December. They don’t have to wait for any official statement from their government.

Only a stable genius like our PM, would assume everything was alright. Actually, the Malaysian leader knew that he had jeopardised trade after he accused India of having invaded and occupied Jammu and Kashmir at the United Nations last month.

India does not need to give anything "official" to Malaysia before officially punishing the country with a restriction or a total boycott of its palm oil. What they needed to do was to leak to international news media like Reuters about the Modi government’s desire to send a strong signal of its displeasure to the Malaysian government. And that was precisely what the Indian government had told Reuters. Besides leaking that New Delhi was considering slashing imports of Malaysian palm oil, the “sources” had also revealed that India, was planning to substitute Malaysian palm oil with supplies of edible oils from countries like Indonesia, Argentina and Ukraine.

The unofficial news also created confusion. Such uncertainties have forced Indian buyers to switch to Indonesia to avoid unnecessary problems. Indonesia and Malaysia are producers of palm oil and they are neighbours so there’s little problem with changes of shipping logistics.

India is the world’s fifth largest economy with GDP of US$3.16 trillion, while Malaysia is ranked 11th with its GDP at US$402.61 billion. According to India’s trade ministry data, Malaysia’s exports to India stood at US$10.8 billion in the 2018/19 fiscal, while imports from New Delhi totalled US$6.4 billion – hence the US$4.4 billion surplus in favour of Malaysia.

In short, Malaysia’s total import of Indian products constituted only 0.2% of India’s GDP. However, India’s total import of Malaysian products was 2.7% of Malaysia’s GDP. This means even if Malaysia stops buying Indian products altogether, New Delhi would most likely not be affected. Unfortunately, the same cannot be said about Malaysia.

Malaysia’s palm oil exports to India in 2018 was valued at US$1.65 billion – just 0.052% of India’s GDP, but account for more than 15% of total Malaysian exports to the country. A trade war should be the last thing on Mahathir’s wishlist. The country simply cannot win a trade war with India, while it’s still facing the effect of US-China trade war.

Lower purchases by India, the biggest buyer of Malaysian palm oil in 2019, could lead to higher inventories and put pressure on Malaysian palm oil prices, which in turn would make 110,000 “unhappy” FELDA settlers.

And now, India is sourcing more palm oil from Indonesia. CGS-CIMB Research head of agribusiness Ivy Ng however believes that this could be a zero-sum game. The potential diversion of palm oil demand by India from Malaysia to Indonesia may not last due to supply constraints in the Indonesian palm oil market. Indonesia could not fulfil the additional demand from India, domestic demand (due to higher B30 biodiesel mandate in 2020) and demand from the other markets at the same time. Some demand may be diverted back to Malaysia over some time. Also, higher demand for Indonesian palm oil could narrow the price gap between Indonesian and Malaysian CPO. Malaysian CPO usually trades at a premium to Indonesian CPO.

After the news broke that Indian refiners are avoiding Malaysia like a plague, Primary Industries Minister Teresa Kok was sent to do damage control, saying Malaysia is exploring the possibility of buying raw sugar from India starting next year to enhance bilateral trade with the country.

Can Mahathir convince China (imported 1.61 million tonnes) and Pakistan (imported 821,591 tonnes) to absorb the 3.9 million tonnes of palm oil if India decides to go full-blown into a trade war with Malaysia? India is the largest importer of Malaysia’s palm oil, followed by China and Pakistan. Malaysia is neither China nor has a huge trade deficit with India that it could use as points in negotiations. Teresa Kok should tell her boss that it would take more than sugar and buffalo to fix the problem. As a start, perhaps Mahathir could repatriate unsavory characters to India to ensure New Delhi would not stop importing Malaysian palm oil while both parties negotiate.

Reference:

1. Mahathir Triggers His Own Downfall, www.malaysia-chronicle.com

2. India’s ‘ban’ on Malaysian palm oil seen a zero-sum game, 29 Oct 2019, The Edge Financial Daily