Malaysian Palm Oil Markets Expected to Remain Firm in June

Malaysian palm oil prices after establishing yearly lows during first quarter of 2020 have resumed the upward trend in last few weeks and continue moving with a positive bias. As more and more countries have started easing lockdowns, there are signs of import demand improving for Malaysian/Indonesian palm oil. The trade relation between India and Malaysia has improved of late, and Indian importers have resumed purchases of Malaysian palm oil last month onwards. Media reports said that large importers have finalized contract worth 2 Lakh tonne of Crude palm oil from Malaysia, during first fortnight of May, which shall be shipped this month and July. Malaysian palm oil just few weeks was available at 15-dollar discount from its nearest export rival i.e. Indonesia and in near term if such discount still prevails then purchases from Malaysia can increase further. Indonesia has recently raised its export levy by $5 per tonne which has prompted Malaysian sellers to offer discounted rates – eventually attracting buyers worldwide.  

As per MPOA (Malaysian Palm Oil Association), production in May month can be lower versus previous month. Therefore with net demand expected to improve, buyers might have to negotiate trades with higher offers in coming weeks.  Production estimate, in fact was expected to increase as per trade sources. The USDA had estimated rise in production in its May month’s demand-supply report. This news therefore came in as a surprise for the industry persons. Imports, as estimated by the USDA are up 1.6 million tons to 49.2 million tons, as food and industrial demand recovers after economic blows from the corona virus pandemic.  

Production losses in Malaysia has increased mainly from the corona virus pandemic and this shortage is estimated to lower annual production by nearly 25% versus previous year.  Economy of Malaysia’s economy is heavily dependent on palm oil trade, as it is the most important agricultural commodity in terms of earning export revenue. In Malaysia, workers in palm plantation are mostly migrant workers from Indonesia, Bangladesh and India rather than the locals. As countries in Southeast Asia struggle to get the Covid-19 outbreak under control, governments have tightened restrictions on both side travel for workers. As a result the country experiences acute labor shortage presently.  

According to an estimate by Rabo bank more than 70% of the country’s plantation workers come from outside Malaysia. Production for the current year was already estimated to reduce by nearly 10% considering previous year’s dry weather and less aggressive fertilization. With increasing labor shortage, now most experts expect production to fall by nearly 25%, or more than double as compared with the previous estimates. Malaysia produces about 26% of the world’s most common cooking oil. It is quite likely that palm oil fruit will be decaying in case there are not enough workers to harvest the crop on time. Also, the fruit that is harvested also has to be transported quickly to the crushing mills, otherwise oxidization starts in this commodity. This increases acidity levels and reduces the oil quality therefore.  

Manual labor’s also required to keep trees pruned and healthy for future seasons. Therefore lack of adequate manpower to manage all these operations shall be detrimental in enhancing the production loss risk. Besides, widening discount to refined soybean oil will be another reason that will be positive for palm oil prices, since cheaper prices from soybean oil will imply higher chances of slight shift in demand from soybean oil, towards palm oil in near future. Therefore under given scenario it is quite likely that palm oil markets in Malaysia will be maintaining upward trend this month.