Bloomberg reported that the European Union (EU) has published a regulation setting new criteria for the use of palm oil in biofuels in its official journal. The new rules will be implemented from 1 June 2019 onwards.
The new rules restrict the types of palm-based biofuel that may be counted towards the EU renewable energy targets and introduces a new certification system. However, palm oil from smallholders, defined as estates smaller than two hectares, will be exempted. In Malaysia, a smallholder is defined as estates smaller than five hectares.
The regulations were proposed on 13 March and subjected to a two-month scrutiny period. During the period, none of the member states voiced objections.
The rulings have become official. This development is negative for palm oil as palm demand from the EU will fall in the long term. The use of palm oil in biodiesel in the EU will be capped at 2019’s levels until 2022. There will be a gradual phase-out of palm in biodiesel from 2023 onwards, leading towards a complete ban in 2030.
Although smallholders are exempted, we do not think that the EU’s demand for palm oil from the smallholders will be enough to offset the fall in demand from the bigger players. In addition, the EU’s definition of smallholders is tighter than Malaysia’s. Smallholders account for 40% of CPO production each in Malaysia and Indonesia.
The EU accounted for 11.6% or 1.9mil tonnes of Malaysia’s palm exports in 2018. According to Oil World, about 49.5% of palm products in the EU are used in the biofuel industry while another 29.8% are used in the food industry. The EU imported 435,000 tonnes of biodiesel from Malaysia and 786,000 tonnes of biodiesel from Indonesia in 2018.
Although there is no barrier against the use of palm oil in the food industry in the EU yet, there is risk that the negative sentiment against palm oil would affect demand from this segment.
Malaysia and Indonesia have said that they will lodge complaints with the World Trade Organisation (WTO) when the EU’s proposals become a law. Also, Indonesia has said that it may halt imports from the EU. The EU exports products such as machinery and equipment, airplanes, wine, dairy products and luxury goods to Malaysia and Indonesia.
We maintain an UNDERWEIGHT stance on the plantation sector. We reckon that CPO prices will continue to be in the doldrums dragged by high levels of inventory.
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