• Bloomberg reported that the European Commission has restricted the types of biofuel from palm oil that can be counted towards the EU’s renewable energy goals. The commission has also introduced a certification system.

• Under the measure adopted by the commission yesterday, palm oil is classified as “unsustainable”. Exemption is for palm oil from smallholders, defined as estates smaller than 2 hectares. In Malaysia, smallholders are defined as oil palm estates smaller than 4 hectares.

• This means that the use of unsustainable food and crop-based biofuels in the EU would be limited from 2019 onwards, with a phase-out in year 2023, leading to a ban by year 2030. Bloomberg said that the new regulation is set for a two-month scrutiny period where the member states and the European Parliament can express objections. If none is received, the measure will be published in the EU official journal and it becomes a law.
• This is negative for palm oil as demand from the EU will drop. The EU accounted for 11.6% or 1.9mil tonnes of Malaysia’s palm exports (all types of palm products) in 2018. Malaysia’s CPO production amounted to 19.52mil tonnes in 2018.
• According to Oil World, the EU used about 49.5% of palm oil to produce biodiesel in 2018 while another 29.8% were used in the food industry. Oil World also estimates that the EU imported about 435,000 tonnes of biodiesel from Malaysia and 786,000 tonnes of biodiesel from Indonesia in 2018. Malaysia’s biodiesel production was estimated at 1.14mil tonnes in 2018 while in Indonesia, biodiesel production was about 5.2mil tonnes.

• The silver lining is that the EU will have to find another feedstock to replace palm oil for the production of biodiesel. Apart from palm oil, the raw materials to produce biodiesel are rapeseed and soybean oil. If rapeseed and soybean oil are used to produce biodiesel, there would be less vegetable oils for the food industry. Hence, there is room for palm oil to replace rapeseed and soybean oil in the food industry.

• The only issue is the negative sentiment against palm oil in the EU. Due to this, we are unsure if food producers in the EU would be open towards using palm oil in their food products.

• Malaysia and Indonesia will be proceeding to the World Trade Organisation (WTO) to take action against the EU’s proposal. There could also be trade retaliation. There have been news reports that Indonesia and Malaysia may halt imports of European products such as cheese. Other products from the EU include designer handbags, airplanes and wine.

• Maintain UNDERWEIGHT on the plantation sector. CPO prices are expected to remain in the doldrums due to high inventories in Malaysia. According to the MPOB, palm inventory was 3.05mil tonnes in Malaysia as at end-February 2019. Average palm inventory in the past five years in Malaysia was 2.07mil tonnes. Spot CPO price fell by RM24/tonne to RM1,956/tonne yesterday on the EU’s proposal.

Source: AmInvest Research - 14 Mar 2019