• The Solvent Extractors Association (SEA) of India has asked its members to refrain from importing palm oil from Malaysia. SEA said that the Indian government has not taken kindly to the unprovoked pronouncements by Malaysian Prime Minister Tun Dr Mahathir Mohamad and is contemplating some retaliatory action.

• Hence as a responsible Indian vegetable oil industry, the importers should avoid purchasing palm oil from Malaysia until there is clarity from the Indian government. Recall that Dr Mahathir said that India had “invaded and occupied” Jammu and Kashmir in a United Nations address in September.

• First, this is negative for the Malaysian palm oil industry as palm demand would drop and inventories would rise. In previous reports, Bloomberg quoted traders as saying that some Indian buyers had already shifted to Indonesia’s palm products for deliveries in November, December and 1Q2020. Industry players in India have said that the processing industry can switch to palm oil from Indonesia, sunflower oil from Ukraine and soybean oil from Argentina.

• Assuming that India’s demand falls by 50% per month, this would increase Malaysia’s palm inventories by about 200,000 tonnes. Based on an inventory of 2.45mil tonnes as at endSeptember 2019, this means that palm stockpiles in Malaysia would rise to 2.65mil tonnes.

• India imported 3.9mil tonnes of processed and crude palm oil from Malaysia in 9M2019 or roughly 434,246 tonnes per month. India accounted for 27.9% of Malaysia’s palm exports in 9M2019. India’s imports of Malaysia’s palm products surged by 107% to 3.9mil tonnes in 9M2019 from 1.9mil tonnes in 9M2018 driven by a reduction in the import tariff on palm products in the beginning of the year.

• In September 2019 however, India raised the import tariff on Malaysia’s refined palm products by 5 percentage points, which eliminated any trade advantage with Indonesia. The import tariff on Malaysia and Indonesia’s refined palm products is now the same at 50%.

• India imports mainly crude palm oil. From November 2018 to August 2019, India imported 5.29mil tonnes of crude palm oil and 2.3mil tonnes of refined palm olein.

• Second, we think that the price discrepancy between Malaysia and Indonesia may narrow. CPO price in Malaysia may fall while CPO price in Indonesia may increase due to the switch in demand from India. Currently, we believe that the price difference between CPO in Malaysia and Indonesia is RM200 to RM300/tonne.

• Plantation companies with significant exposure to Indonesia are Kuala Lumpur Kepong (KLK), Sime Darby Plantation, Genting Plantations, IJM Plantations and TSH Resources. Plantation companies with palm refineries in Indonesia include KLK and Sime Darby Plantation.

• We maintain our NEUTRAL stance on the plantation sector. We do not know how long the trade spat between India and Malaysia will last. In the short term, Malaysia may lose market share in India to Indonesia.

• India imported about 6.7mil tonnes of palm and kernel products from Indonesia in 2018 compared with 2.5mil tonnes of crude and processed palm products from Malaysia. In comparison, India accounted for 14.2% of Indonesia’s palm and kernel exports in 7M2019. India accounted for 27.9% of Malaysia’s crude and processed palm exports in 9M2019.

Source: AmInvest Research - 22 Oct 2019