May 22, 2019 03:28 PM

Trade War Adds to Headaches Faced by Palm Oil Industry

Workers harvest oil palm in South Sumatra, Indonesia, on April 14. Photo: IC Photo
Workers harvest oil palm in South Sumatra, Indonesia, on April 14. Photo: IC Photo

(The Straits Times) — A decade ago, when palm oil prices were around twice what they are now, Darsini and her husband wanted a piece of the action.

The couple, both high school teachers, saved enough from their combined monthly salary of about 10 million rupiah ($690) to buy 4.5 hectares (11.1 acres) in East Kalimantan, where Darsini's brother lives.

They planted oil palm, eventually earning as much as 1.5 million rupiah every few weeks when the fruit was harvested. With three kids bound for university, the extra money would come in handy.

But now, that income has dried up as China's trade war with the United States adds to the headaches for palm oil producers, who were already confronted by growing protectionism in key markets such as the EU and India.

China's tariffs on U.S. soybeans have led to markets being flooded with the commodity, which, while not a perfect substitute for palm oil, can still be used in biofuel.

Palm oil prices have fallen 40% since U.S. President Donald Trump took office in early 2017.

While prices have recovered since hitting a decade-low in December, Darsini, who goes by one name, said it is not worth spending the 500,000 rupiah it costs to harvest. "We have to tighten the daily budget. Some days, it's just rice and sambal," the 47-year-old said, referring to the spicy sauce often served with Indonesian meals.

Palm oil, used in products ranging from biscuits to cosmetics, is one of the region's most important commodities, earning more than $50 billion in exports for key producers Malaysia and Indonesia.

It is also among the region's biggest employers. At least a quarter of the oil palm fruit originates from small blocks like Darsini's.

Around 16 million Indonesians owe their jobs to palm oil. Hundreds of thousands of workers from low-wage countries, including Bangladesh, work in plantations in Malaysia, where wages are higher.

Hopes over a U.S.-China trade deal were dashed this month when Trump raised tariffs to 25% on $200 billion worth of Chinese goods, up from 10% previously. China has retaliated by announcing that it would raise tariffs on $60 billion of U.S. imports.

But that stand-off is not the only trade dispute weighing on prices.

In March, the European Commission banned palm oil for use as a renewable fuel owing to worries that it contributes to deforestation.

The EU wants to derive about a third of its transport fuel from renewable sources by the end of the next decade. Removing palm oil from the list of renewable fuels will mean it will be phased out at the pumps, analysts said.

The Indonesian and Malaysian authorities said the move amounts to protectionism. Biofuel from crops grown in the EU, such as rapeseed, still counts as renewable.

Last month, Indonesian President Joko Widodo and Malaysian Prime Minister Mahathir Mohamad co-signed a letter of protest to the European Commission.

Separately, India raised import duties on palm oil last year although it eased the tariffs somewhat earlier this year. Imported refined palm oil, for example, faces a 50% tax.

It was not supposed to be this way. Last May, China vowed to lift palm oil imports by 500,000 tons. It was already the destination for 12% of palm oil exports, against 15% for the EU. Palm oil prices have slumped 20% since the announcement.

Producers said finding and keeping new markets is increasingly important and more challenging amid signs of growing protectionism.

"Trends in the EU and the U.S. as well as other markets, such as India, show that there is a move to protect national interests and producers from cheaper imports," said Richard Fung, director of investor relations at Golden Agri-Resources, a unit of Sinarmas.

Producers said palm oil prices would eventually recover thanks to its versatility and as big markets like China consume more processed food and use it as a substitute for soybeans in biofuel.

Still, lower prices may be here for a while yet. Hopes that China can steady prices seem farfetched, said Makhdzir Mardan, the Council of Palm Oil Producing Countries' deputy executive director. "China will buy what it needs to buy."

This story was originally published by The Straits Times. To read the original, click here.

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