Palm oil glut to impact producing countries

According to Nikkei Asia, weak prices for palm oil are pushing Indonesia and Malaysia - two of the world's biggest producers to boost domestic use through developing jet fuels and expanding biodiesel programs.

Widely used in Indonesia for cooking oil and applications such as personal care and cleaning products, palm oil is an important sector in Southeast Asia's largest economy with the industry employing millions of workers. Indonesia is the world's largest exporter and it is the country's top export commodity, apart from coal. Palm oil is similarly important in neighboring Malaysia, the world's second-largest producer and exporter.

The benchmark crude palm oil (CPO) price in Malaysia ranged from 3,500 ringgit (US$755) to 4,200 ringgit per ton between January and June. That is compared to the all-time high in April 2022 of almost 7,000 ringgit per ton, following the launch of Russia's invasion of Ukraine, which sent prices of all edible oils skyrocketing. That run-up in prices for palm oil, traditionally the cheapest among vegetable oils, was a continuation of one caused by pandemic-related disruptions since late 2020.

"Elevated inventories in India and mainland China, an expected increase in global soybean production through the 2023-24 season, and the upcoming September-October period of peak palm fruit yields - all point to downward pressure on prices through the remainder of 2023, BMI, a research unit of Fitch Group, said in an August 15, 2023 note.

"Through the medium term, it remains our view that average annual palm oil prices will continue to ease."

BMI forecast an average price of 3,800 ringgit per ton for Bursa Malaysia-listed third-month palm oil futures contracts in 2023, down from the average of 4,910 per ton last year. It also forecast prices will continue to fall, reaching 2,400 ringgit a ton in 2027 -- on par with a five-year pre-COVID pandemic average of close to 2,420 ringgit per ton.

The declines have hurt incomes of major palm oil producers after many enjoyed record profits in 2021 and 2022.

In Malaysia, state-owned conglomerate Sime Darby Plantation reported that second-quarter net profit fell by 54% to 380 million ringgit from the same period in 2022. FGV Holdings, also government linked, saw its plantation sector plunge 97% to 13.76 million ringgit, mainly due to the lower average CPO price compared to the previous year and on top of lower CPO sales and 37% higher CPO production costs.

In Indonesia, net income at top producers Sinar Mas Agro Resources and Technology, Astra Agro Lestari and Salim Ivomas Pratama declined 85%, 54% and 71%, respectively, in the first half of 2023, to 284.3 billion rupiah ($18.7 million), 367.6 billion rupiah and 128.4 billion rupiah.

Political issues also weigh on producers. A European Union regulation on deforestation-free supply chains entered force on June 29, 2023. S&P Global said in August that combined with the EU's renewable energy directive, which limits the use of palm oil for biofuel in EU markets starting in 2030, the new law is "seen as another layer of restrictions by palm oil producing countries."

Indonesia and Malaysia account for about 85% of global palm oil trade while the EU is typically the third largest importer after China and India. Indonesia, Malaysia and the EU have reportedly agreed to form an ad hoc task force to hash out issues related to the implementation of the deforestation regulation.

To deal with the market and political pressures, Jakarta and Kuala Lumpur are seeking new ways to utilize the commodity.

State-owned airline Garuda Indonesia in August announced the start of a static test on a "sustainable aviation fuel," or "bioavtur," on an engine used in its Boeing B737-800 NG fleet, with ground and flight tests to follow. Garuda's bio jet fuel is jointly developed by Indonesian state oil company Pertamina and the Bandung Institute of Technology.

Also last month, Indonesia expanded its mandatory B35 biodiesel program -- produced by Pertamina -- nationwide, after a partial introduction in February. B35 has a higher palm oil content in the diesel mix than the B30 launched in early 2020. Indonesia is next targeting B40 for 2030.

Indonesia is pushing the biodiesel program expansion as palm oil prices have fallen from the record highs. Malaysia is also exploring its own biofuel efforts.

The Malaysian Palm Oil Board and state energy giant Petronas signed an agreement in August to study using cooking oil and palm oil waste as sustainable aviation fuel. In the second phase of the National Energy Transition Roadmap launched late last month, the government included a B30 biodiesel mandate on heavy vehicles by 2030 after rollout by 2025.

Yusuf Rendy Manilet, economist at Indonesian think tank Center of Reform on Economics, sees Indonesia's biofuel policy as ultimately viable. 

"The government's goal is to reduce dependency on imports of oil by leveraging biofuels in order to improve the trade balance," Manilet told Nikkei Asia. "In the long run, with more biofuels becoming available and oil imports reduced ... fuels will become more affordable and lead to improving purchasing power."

BMI said increasing biofuels uptake could pose a "major upside risk" to its price outlook for edible oils overall. "An increase in the rate of diversion of palm oil to the manufacture of blended biofuels -- or, the greater diversion of alternative edible oils, such as soy oil, to biofuels - would tighten the supplies of edible oils for food consumption."

It added that the developing El Nino weather phenomenon, marked by drier and hotter weather in Southeast Asia, poses another major upside risk to its palm oil price outlook over the next 12 to 18 months -- although "much depends on the eventual strength of the El Nino event itself."

BMI said the 2014-16 El Nino, one of the most severe of modern times, led to double-digit annual declines in percentage terms for crop yields in both Malaysia and Indonesia over the 2015-16 season -which resulted in palm oil prices rising by 1,000 ringgit per ton during the period.

Can Wang Yi improve US-China relations?

According to Nikkei Asia, Chinese President Xi Jinping's decision to recall senior diplomat Wang Yi to head the Ministry of Foreign Affairs reflects a misstep, but it could be a crucial move ahead of US-China summit in November 2023.

"Qin Gang's fall from grace was as unexpected and abrupt as his elevation over the heads of many experienced diplomats," said Daniel Russel, a former diplomat who now is an expert at the Asia Society Policy Institute, United States. "Since both moves are attributed to China's leader, this episode will be seen as an embarrassing lapse in judgment at the top."

By and large, analysts do not expect any change to the direction of China's foreign policy, guided by Xi's thinking on diplomacy, aimed at seeking to assert global influence in line with the country's development achievements.

"Whether this is, in fact, effectively a placeholder appointment until a younger official gets the nod is unclear, but for now Wang is the most dominant foreign affairs official in China for a very long time," said Bill Bishop, a China expert at sinocism.com.

Known for his tough-talking style, the 69-year-old Wang held the ministerial portfolio for a decade before being promoted in October last year to head the Communist Party's Foreign Affairs Commission in charge of policymaking. He is also a member of the party's top decision-making body, the Politburo.

"Wang's oversight of policy implementation is therefore likely to strengthen the consistency of Beijing's diplomatic messaging and actions, while further cementing the party's already strong guidance of foreign affairs," US consultancy Eurasia Group wrote in a note.

His return, while signaling a comeback for more aggressive "wolf warrior" diplomacy, is seen as crucial ahead of a series of international events, notably the Asia Pacific Economic Cooperation summit to be hosted by the United States later this year.

"A key agenda item in US-China relations is whether the working and ministerial level can set the conditions for a successful visit of Xi to San Francisco for APEC in November," said Rorry Daniels, a senior fellow at the Asia Society Policy Institute's Center for China Analysis.

Reappointing Wang also reflects Xi's preference for someone with a track record of defending China's positions, such as its stance on Taiwan, well as asserting the country's interests amid geopolitical tensions with the United States and its allies.

"This could complicate the Biden administration's efforts to maintain and build on the recent detente in the bilateral relationship," Eurasia Group wrote.

Wang's reappointment has been broadly welcomed in Indonesia. "Wang Yi's return could even be bringing a sense of predictability and ease to Indonesian ministers, who already have good relations with him for a long time," said one analyst, who spoke on condition of anonymity.

The Next Giants

I am inclined to refer to writing by Shigesaburo Okumura, Editor-in-chief, Nikkei Asia. This, not only hints towards shifting paradigm, but also that world economic growth will be driven by Asia and not by United States or Europe. I quote below:

For the first time in 10 years, yellow sand from the deserts of Mongolia and Kazakhstan has blown into Tokyo. The arrival of the "Asian dust" is a traditional indicator of the coming of spring. It may only be a grain of sand, but seeing that tiny piece of earth makes me feel like I'm a part of Asia. That is not a bad feeling.
 
As the first Big Story of Japan's fiscal New Year, we look at a ranking of Asia's 500 fastest-growing companies, prepared in collaboration with the Financial Times of the UK and Statista of Germany.
 
Of those high performers, our story focuses on seven. That includes the top-ranked company, Carro, a Singapore-based online used-car sales platform. We also highlight its Malaysian competitor, Carsome, which stands at 17th in the ranking.
 
The secret of Carro's success is that it provides detailed reports of any flaws found with its vehicles.
 
In the world of microeconomics, used-car markets are considered a typical "market for lemons," in which buyers cannot judge the real value of the fruit based on its appearance. Removing information asymmetry between sellers and buyers is crucial if the market mechanism is to work effectively. It makes sense, then, that Carro's strategy is so popular among its customers: With the information gap removed, clients are able to buy used cars at a fair price.
 
Other than online car dealers, the story also features Indian mattress seller Wakefit; Singapore-based delivery company Ninja Logistics; South Korean robotics startup Twinny; Japanese software startup AI Inside, whose technology converts handwritten documents into digital data; and New Zealand electricity retailer Electric Kiwi.
 
The ranking is based on the companies' compound annual revenue growth rate between 2016 and 2019. The performances do not reflect the impact of COVID-19, but reading these entrepreneurial success stories, I am convinced that such "animal spirits" will drive the revival of the post-COVID world.
 
Market Spotlight this week is a story on Appier, the first Taiwanese startup to list in Japan since Trend Micro went public in 1998, while our Business Spotlight looks at Bilibili, known as "China's YouTube."
 
Asia Insight is an examination of the Tokyo Olympics. According to the latest Kyodo News poll, only 23.2% of Japanese support holding the games this year.
 
As for the mounting costs amid the diminishing enthusiasm, a professor at College of the Holy Cross in the United States points out in the story that the Tokyo Olympics are "basically the last in the old world where the concept was you spend an unlimited amount, and everyone should be all right with that because it's the Olympics."
 
While we're on the subject, there is talk of a possible boycott within the Western world of the Beijing Olympics in 2022, because of human rights issues related to the Xinjiang Uyghur Autonomous Region.
 
Some apparel brands, including Muji, are facing potential criticism for using Xinjiang cotton, which has become a focus of attention amid claims of forced labor. The Japanese company maintains its cotton is ethically produced. The story describes the difficulties that private companies must navigate in dealing with this highly sensitive issue in China.
 
I also recommend our stories on Myanmar's Generation Z, and the reopening of the Suez Canal.
 
Please do not miss our opinion piece on the #StopAsianHate movement. The author writes that "'Asian hate' has also long encompassed stereotypes and discrimination against ethnic and religious minorities as well as against indigenous peoples, including within Asia" and that "the need to 'Stop Asian Hate' is not just a US or European challenge."
 
I agree that we have to discuss this issue in a broader context, so that more people regard this problem as their own.