Dr M's visit to China could ramp up palm oil exports

KUALA LUMPUR: Prime Minister Tun Dr Mahathir Mohamad's (pix) visit to China in August could be a timely opportunity to ramp up palm oil exports to the world's second-largest economy.

The prospect of higher palm oil exports looks bright as Beijing seeks cheaper alternatives to more expensive soybean imports from the United States (US) in the aftermath of tit-for-tat tariffs which has sparked a trade war between the two countries.

Palm oil is the closest edible oil substitute to soybean oil, but it won't be an easy ride for Malaysia because others too are eyeing the huge and populous Chinese market.

While taking advantage of the spat between the two giant economies and trying to sell more to China would be opportunistic, Malaysian palm oil exporters will have to compete for head-on with other producers of the commodity, particularly neighbouring Indonesia.

Indonesia is the world biggest producer of palm oil and oil palm plantations span 11.9 million hectares. This acreage is likely to increase to 13 million hectares in 2020, according to data released by the country's statistics agency.

But this should not deter Malaysian exporters from the palm oil sector who must have the confidence and work towards garnering greater buying support from China, which is also the world's biggest consumer of the edible oil.

Palm oil is widely used in the Chinese food industry, especially in the manufacture of instant noodles, snack foods, milk powder, margarine and shortening, which is why there are ample opportunities for export, despite the looming competition.

Moreover, there is a huge demand for vegetable oils given China's population which is in excess of 1.38 billion and therein, also lies the opportunity to further push palm oil sales to the country.

Edible oil analyst Thomas Mielke's recently commented that "China cannot satisfy all of its soybean import demand from non-US origins and is likely to raise palm oil imports". This augurs well for Malaysia.

Elsewhere, FGV Holdings Bhd hopes increased palm oil exports into China will be among topics to be raised when Dr Mahathir meets his counterpart, Chinese President Xi Jinping.

"We expect the Prime Minister's official visit to China to benefit the palm oil sector," FGV President and Group Chief Executive Officer, Datuk Zakaria Arshad said recently.

He also expressed concern that bulk purchases of palm oil by China had decreased following competition from Indonesia and other exporting countries.

As the world's third-largest palm oil exporting company, FGV has a market share of between 20% and 30% of exports to China, which is why an increased offtake from the country will impact the company directly and favourably.

The renewed vigour towards raising palm oil exports by China came about as the country retaliated against US President Donald Trump's move to impose US$50 billion (RM202 billion) in tariffs. It could raise the price of almost half of everything the US bought from China.

Beijing hit back by imposing a 25% hike in tariffs on US soybean imports on July 6, which would result in higher prices of soybean and soy-related products entering China and forcing buyers there to look for cheaper alternatives.

In the immediate term, the trade war does not look like it will be easing anytime soon after Trump also imposed another 10% in tariffs on US$200 billion (RM810 billion) of Chinese-made products from food to electronics, effective Aug 30.

China's Xi Jinping has urged other countries, including developing economies to work with Beijing to counter the US tariffs.

If Dr Mahathir manages to get a commitment from China to raise palm oil imports from Malaysia, it would be a boon for domestic CPO prices which unfortunately look set to ease in the near-term in anticipation of rising production in the coming months.

Phillip Futures Sdn Bhd Derivative Product Specialist David Ng noted that CPO prices last Friday breached the critical support level of RM2,200 per tonne, saying, it is expected to decline further in the short-term.

The next support level is seen at RM2,100 and resistance at RM2,310 a tonne.

"However, over the longer term, the US-China trade war would benefit palm oil as the latter seeks an alternative to soybean," Ng told Bernama.

China could very well be the answer to bolstering CPO prices where the trend has been easing due to hefty inventories, rising production, lower exports coupled with soft demand from various export destinations.

If China does decide to raise palm oil imports from Malaysia significantly, it would also go a long way in easing concerns over the expected loss in demand from Europe, following the European Union's (EU) decision to eliminate palm oil-based biodiesels, although effective from 2030.

China imported palm oil worth RM9.42 billion from Malaysia last year compared to the EU (RM11 billion).

Understandably, there is optimism that the US-China trade war could benefit Malaysian exporters, but only if there is a definitive commitment from Beijing to buy significantly more palm oil from Malaysia.

As at May 2018, exports of palm oil fell 15.65% to 1.29 million tonnes from 1.51 million tonnes recorded in the same month a year ago, with China, India and Pakistan emerging the top three consumers. — Bernama