Crude oil hit more than US$130 a barrel after Russia launched its so-called special military operation in Ukraine. But crude oil was not the only commodity which skyrockets after the invasion. Sunflower oil, the world’s third most traded vegetable oil after palm and soybean oil, also hit the roof. Worse, Ukraine and Russia accounts for 46.9% and 29.9% respectively of global exports of sunflower oil.
With 80% of worldwide sunflower oil exports affected, naturally the Ukraine war benefits palm oil and soya oil producers. Indonesia and Malaysia constitute 85% of the world’s palm oil supply followed by Nigeria, Thailand and Colombia. Hence, like the crude oil, the price of palm oil skyrockets as consumers rushed to source the oil amid the shortfall in sunflower oil.
Days after the Ukraine invasion, crude palm oil (CPO) prices topped RM8,000 a tonne for the first time on March 1. That’s almost double the 2021 average price of RM4,407 per tonne for palm oil. Driven by the bullish sentiment, some palm oil experts predicted that the CPO price will trade between RM4,000 and RM9,427 per tonne in 2022. Some politicians took the opportunity to claim credits.
Taking advantage of the bullish sentiment, Minister of Plantation Industries and Commodities Zuraida Kamaruddin told all and sundry on March 13 that the price of crude palm oil is expected to continue to rise at least until the third quarter of this year. She even shamelessly said that the vegetable oil, used primarily in processed food, is projected to hit RM9,300 a tonne.
Less than a week after Zuraida’s brilliant prediction, the CPO plunged to RM6,100 a tonne. However, on April 22, Indonesia stunningly announced that it will ban exports of palm oil, which covered both crude and refined palm oil exports – crucial for goods ranging from shampoos to Nutella to fried foods. President Joko Widodo said he wanted to ensure the availability of food products at home.
It didn’t take long for Indonesia to flip-flop, clarifying that it would not ban exports of crude palm oil, but only the refined versions. Then, on April 27 (five days later), it made a U-turn again, saying the ban would in fact include the export of crude palm oil after all. So, what actually happened in Indonesia, the world’s largest producer of palm oil?
In 2021, Indonesia produced a jaw-dropping 51.3 million tonnes of palm oil, where almost two-thirds – 34.2 million tonnes – was exported, leaving the remaining 17.1 million tonnes for domestic consumption. It exported almost the same amount of palm oil products in 2020, generating more than US$15 billion in revenue – an average of US$440 a tonne.
According to the Indonesian Palm Oil Association, the country is projected to earn US$34 billion (based on estimation of US$1,000-US$1,250 per tonne) from exports of 34.44 million tonnes of palm oil in 2022. This means not only Indonesia should not have experienced a shortage of cooking oil domestically, palm oil is so crucial it contributes 13% of Indonesia’s total export.
Even out of the 17 million tonnes for domestic consumption, only 8.9 million tonnes produced in 2021 was used to produce cooking oil, meaning less than 18% of locally produced palm oil is for cooking. As much as Indonesians like fried dishes, there was no way the palm oil producer would face any shortage of cooking oil. Yet, by March, it was so bad that Indonesian people scrambled to buy cooking oil.
Images of people queuing for cooking oil, one of the nine basic commodities, as well as empty shelves at mini markets and supermarkets had gone viral. Many Indonesians have been complaining that the essential commodity was nowhere to be found, or sold at a price that was out of reach for the lower income class. Obviously, the people were not impressed with the crisis.
The scarcity and increase in cooking oil price became worse after an intervention by the government. Beginning February 1, 2022, the government enforced the Highest Retail Price (HET) – palm-based cooking oil at 11,500 rupiah (US$0.79) per litre, simple-unrefined packaged cooking oil at 13,500 rupiah (US$0.93) per litre, while premium packaged cooking oil at 14,000 rupiah (US$0.96) per litre.
Generally, Indonesian consumers buy two types of cooking oil – pricier packaged and branded oil, and a subsidized version sold in bulk for lower-income households. The price of branded cooking oil has almost doubled, from about 14,000 rupiah per litre in March 2021 to 22,000 rupiah per litre in March 2022. By triggering the HET, the government was forcing producers to sell at a loss.
To be fair, the Jokowi administration was trying to help the people. The intervention was taken as part of a policy called Domestic Price Obligation (DPO) to deliver cooking oil at affordable prices for the low-income Indonesians. However, the government did not consult the producers and had underestimated the power of “cartels and speculators”, who refused to accept the new “below the market” prices.
Even in December 2021, before the Ukraine invasion, cooking oil was selling at more than 20,000 rupiah per litre. Thus, distributors quietly rebelled, withholding supply meant for retail centres and markets. As cooking oil supply dried up, panic buying followed, leading to chaos and public outcry. Eventually, Trade Minister Muhammad Lutfi was forced to revoke the HET on March 16.
Hilariously, as soon as the HET was scrapped, tonnes of cooking oil suddenly reappeared in the markets – at almost double the price set by the Jokowi government. Still, it did not solve the problem of high prices of cooking oil. In retaliation against the cartels and speculators, President Jokowi decided to ban the export of palm oil entirely beginning April 28, preventing them from exporting – and profiting – at a higher price.
But the ban is good news to Malaysia, right? Not exactly, despite the golden opportunity for the country to snatch some of the market share left by neighbouring Indonesia. On April 24, just two days after the Indonesia’s surprising announcement to ban exports of palm oil, Zuraida said Malaysia is confident it can meet global demand for palm oil. She had no idea what she was talking about.
Four days ago (May 10), the clueless minister was still talking about how to boost Malaysia’s market share. Zuraida said her ministry has proposed to the finance ministry to set up a committee to look into the idea of cutting the export tax on palm oil to 4%-6% from the current 8% in order to grow the market share. The best part – a decision cannot be made till June.
So, the unelected backdoor government of Ismail Sabri needs time from “April to June” just to make a decision as simple as whether to reduce tax to grab market share from Indonesia. With Indonesia temporarily crippled and the world getting even more desperate due to the tightening global supplies, do you think a 4% export tax is such a big deal to countries interested to buy palm oil?
Anisa Khan, a restaurant owner in London, told Euronews – “With the increase of sunflower oil price, our costs have gone up 200% to 300% – a significant increase”. Supermarkets have rationed sunflower oil sales in the United Kingdom, Spain, Italy, Greece and elsewhere after average prices per metric tonne jumped around 58% to US$2,361 in March from a month earlier.
In India, where people mainly cook with palm, soybean and sunflower oils, refiners bought crude sunflower oil at a record price of US$2,150 a tonne, including cost, insurance and freight (CIF) for April shipments, compared with US$1,630 before Russia invaded Ukraine. The alternative vegetable oil to India – soybean oil – too has seen its price jumped 48% for the year.
Even soybean oil prices in South America surged to historical highs, above the US$1,900 per metric tonne mark for the first time. Since the Ukraine invasion, soybean oil in Brazil and Argentina has increased more than 50% this year alone. Palm oil, which India imports 90% of its need from Indonesia and Malaysia, was the cheapest oil preferred by Indian households, hotels, restaurants and bakeries.
Hence, even if revising the export tax is essential, why must Malaysia take so long to decide? In truth, Zuraida was talking cock because she knew Malaysia’s production itself has been strained for more than two years due to a severe labour crunch following Coronavirus pandemic, made worse by former backdoor PM Muhyiddin’s mishandling and mismanagement.
The labour crisis started when Home Minister Hamzah Zainudin, who monopolizes the manpower supply, ordered the police and immigration to hunt down foreign workers last year, despite Covid-19 pandemic – a deliberate move to create a shortage of workers. At least 124,423 illegal foreign workers were arrested, and generated RM71 million through compounds.
After a shortage of labour has been created, the same corrupt home minister happily said employers who are interested in hiring foreign workers will have to bear all the costs involved in bringing them into Malaysia. The SOP (standard operating procedures) for foreign worker entry, involving 4 stages – pre-departure, arrival, post-arrival (quarantine period) and post-quarantine – is essentially a goldmine to the home ministry.
Mr Hamzah was basically repeating the process of recruiting foreign workers after sending them back. It’s the same way how former deputy Prime Minister Zahid Hamidi made billions running the business of importing 1.5-million Bangladeshi, each charged between RM1,500 and RM2,500 per head, depending on the sector – manufacturing, construction, service or plantation and agriculture.
In fact, it was such a lucrative business that both Home Ministry and Human Resources Ministry were fighting over which agency should be in charge of the recruitment and management of migrant workers. To make matters worse, nobody – not even the government – knows the exact number of documented and illegal migrants in the country.
As of 30 June 2017, the official figures showed there were 1,781,598 foreign workers in the country. In 2018, however, it was estimated that a total of between 3.85 to 5.3 million migrant workers were already residing in Malaysia, including undocumented or illegal workers. The situation is worse in East Malaysia or Borneo states (Sabah and Sarawak).
Unlike Singapore, the dubious status of foreign workers in Malaysia was partly responsible for U.S.’ import bans on Malaysian palm oil producers such as FGV and Sime Darby over “restriction of movement, isolation, physical and sexual violence, intimidation and threats, retention of identity documents, withholding of wages, debt bondage, abusive working and living conditions, and excessive overtime.”
In September 2021, Human Resources Minister M Saravanan said his ministry approved the recruitment of 32,000 migrant workers for palm oil plantations. So far, it remains empty talks. At first, Minister of Plantation Industries and Commodities Zuraida said a new batch of foreign workers will arrive in April (eight months delay). When that failed, she promised it would happen in May. Now she said probably in June.
Still, the arrival of 32,000 migrant workers, if it ever happens, is insufficient to plug the serious labour shortage of 75,000 harvesters. Already, the shortage had cost the country RM30 billion in revenue loss for the financial year 2021. Plantation workers, about 80% of whom are Indonesian migrants, typically harvest palm oil fruit once every 10 to 14 days. The labour shortage forced them to only harvest once a month.
If the incompetent and weak government of Ismail Sabri does not solve the labour problem fast, not only will the country continue to lose RM30 billion, but also the potential revenue left wide open by Indonesia. Based on the projection that Indonesia would export 34.44 million tonnes of palm oil in 2022, the current price of RM7,000 means a revenue of RM241 billion.
Indonesia accounts for roughly 60% of global production, ahead of Malaysia’s 25%. Hence, Malaysia cannot completely replace Indonesian supplies. However, oil consumers like India is keen to reduce their reliance on “unpredictable” Indonesia. If Malaysia could steal 10% of Indonesia’s export, it would translate to 3.4 million tonnes or revenue of RM24 billion (based on an average price of RM7,000 a tonne).
For every month that Indonesia’s export ban stays, there’s an average RM20 billion per month of palm oil revenue opened for grab by rival Malaysia. And if the palm oil price skyrockets to RM9,300 a tonne, as predicted by Minister Zuraida, the monthly revenue similarly will shoot to RM31.6 billion. Adding the RM30 billion to RM24 billion, Malaysia could potentially lose RM54 billion due to incompetence and corruption.
But commodities experts say Malaysia lacks the policy and physical infrastructure to retain the market share it gains amid the supply crisis. Indonesia will most likely lift its export ban very soon and flush the markets with its stockpile of palm oil, maintaining its market share. It was already a sitting duck, yet Malaysia government is simply too useless and hopeless to capitalize on the opportunity.
Source : Finance Twitter