Environmental Concerns Add to Palm Oil’s Demand Woes

26 November, 2012 | Source: The Jakarta Globe

The world’s biggest palm oil producers, under pressure to come up with ways to perk up demand from top consumers China and Europe during a meeting this week, may also have to defend the edible oil from renewed attacks over its green credentials.



Malaysia and Indonesia account for about 90 percent of the world’s annual palm oil production of about 45 million tons.

Europe’s financial woes, and China’s slowing economy, have reduced their appetite for palm oil, which has left top producer Malaysia with record high inventories of 2.51 million tons as of October, and created a major headache for traders.

The rising stocks have shaved a quarter off the value of palm oil futures this year, and prices — currently at around 2,400 Malaysian ringgit ($780) a ton — are likely to fall further unless consumption picks up significantly.

Overshadowing a possible revival in demand is renewed concern in the West about the environmental credentials of the industry behind the world’s most popular edible oil, highlighted by a recent visit by the US Environmental Protection Agency to Indonesia and a French proposal to steeply increase duties on foods using palm oil, which has been dubbed the “Nutella tax.”

“The focus will be on demand and whether weak demand will persist,” Ben Santoso, a plantations analyst with DBS Bank in Singapore said, speaking ahead of the 8th Annual Indonesian Palm Oil Conference due to start on the island of Bali on Wednesday.

Palm oil is used mainly as an ingredient in food such as cookies and ice cream, or as a biofuel.

“Demand is the main issue and whether it is strong enough to absorb good production,” said a Singapore-based trader. “All issues voice down to demand.”

Crude Grades, Green Credentials

High on the delegates’ agenda will be the impact of a proposed cut in crude palm oil export taxes by Malaysia, which comes almost a year after Indonesia took the rug out from under its rival by reducing export taxes on refined palm oil to boost its processing industry.

The Malaysian government, in a bid to entice customers, said it planned to cut export taxes for the crude grade to 8-10 percent from 23 percent early next year. The proposal has already helped stem losses in crude palm oil prices.

Conference delegates will be seeking a clearer picture of how the Malaysian tax cut will impact trade flows, especially as China, the world’s second largest importer of the cooking oil, is set to introduce stricter quality measures next year which could give greater importance to crude grades over refined palm oil.

“You have issues like import and export taxes which are going to increase competition in some areas,” said Ivy Ng Lee Fang, senior regional analyst at CIMB. “At the same time you have a lower price environment.”

“There is also a lot of new regulations in some of the key consuming markets, like China, and a lot of protectionism or anti-palm oil lobbying like the Nutella tax in France.”

In the last few years, top producer Indonesia has seen rapid growth in production of palm oil, with output this year expected to be between 23 million and 25 million tons, with about 18 million tons exported.

This year, palm oil estates sprawl across 8.2 million hectares of Indonesian land, and that is expected to rise about 200,000 hectares a year for the next decade.

But green groups have been critical of expansion in the palm sector, which they blame for deforestation, speeding up climate change, ruining watersheds and destroying wildlife.

To improve its green credentials, Indonesia signed a two-year forest moratorium in May last year, although critics say breaches still occur. A possible renewal next year will be on industry players’ radars at the conference.

“The moratorium is a very hot topic,” DBS analyst Santoso said. “The issue is so complex that maybe nobody will have the answers.”

 

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