Palm oil prices will be supported by Indonesia’s reintroduction of a palm oil levy, Sime Darby said, but admitted its own output will be curtailed by a shortage of workers, the group’s treatment of which has earned it a ban on exports to the US.
The Malaysian-based group, which is the world’s top palm oil company by area, said that the overhang of inventories of the vegetable oil, stemming from a short-lived Indonesian export ban earlier this year, had eroded following the country’s switch to a regime encouraging shipments.
“Inventory levels in the global palm oil market has started to improve as Indonesia has relaxed export restrictions, loosened supply chain bottlenecks and allowed for higher exports,” through measures including the suspension of its export levy, Sime Darby said.
Gapki, the Indonesian palm oil industry group, on Monday reported the country’s palm oil exports expanding by 10.3% year on year in September, allowing a shrinkage in stocks to a 2022 low of 4.03m tonnes.
‘Expected to be supportive’
Now that stocks have been reduced, the decision by Indonesia, the top-ranked palm oil producer and exporter, to reintroduce its export levy, “is expected to be supportive to palm oil price”, Sime Darby said.
Palm oil prices, which on the Kuala Lumpur exchange in September fell below half their record levels set six months before, have “now stabilised as increased supply in producing countries fulfils pent-up global demand,” the group said.
“The CPO [crude palm oil] price is anticipated to remain attractive in comparison to alternative vegetable oils which would continue to support demand.”
Palm oil vs soyoil
The comments came even as palm oil futures jumped on Tuesday by 3.9% to 4,006 ringgit a tonne for February, buoyed by factors including signs of growth in Malaysian exports, which cargo surveyor ITS said rose by 9.6% month on month in the first 20 days of November.
Furthermore, a recovery in the ringgit faltered amid political uncertainty in Malaysia, where elections at the weekend failed to deliver a clear winner, leaving two coalitions racing to meet a deadline to form a government.
Ringgit strength, in undermining Malaysia’s export competitiveness, had fostered a November decline in Kuala Lumpur prices until this week.
Tuesday’s recovery reduced by some $21 per tonne to $696 per tonne the discount of Kuala Lumpur palm oil prices to those of Chicago soyoil, the rival vegetable oil, although this remains an unusually large gap.
However, Sime Darby’s ability to exploit palm oil prices which remain high by historical standards will be undermined by a continued shortfall in workers, for which Malaysian plantations rely on immigrants, largely from Bangladesh and Indonesia, many of which returned home during the pandemic.
“The group expects its overall FFB [fresh oil palm fruit bunch] production to be lower than the previous year due to the slow inflow of foreign workers into Malaysia,” the group said.
For the July-to-September period, Sime Darby reported a 27% plunge in fresh fruit bunch output in Malaysia, “largely due to the shortage of harvesters”, which was only in part offset by improvements at its plantations in Indonesia and Papua New Guinea.
Group palm oil output fell by 12% to 1.60m tonnes.
“Nevertheless, the group is optimistic for 2023 [FFB] production as more foreign workers are expected to arrive, and ongoing efforts to digitalise, mechanise and automate operations are expected to increase productivity, particularly in Malaysia.”
The group hopes through mechanisation to cut its reliance on labour to one worker per 17.5 hectares, from an industry average of 8 workers per hectare.
Forced labour allegations
The comments come as the group, which reported a 35% dip to 396m ringgit in earnings for the July-to-September quarter, is shaking up its labour practices, after being banned from selling its products into the US because of allegations of forced labour.
The company has also been told by the Roundtable on Sustainable Palm Oil to improve its labour practices, which have attracted claims of threats and intimidation, arbitrary penalties, physical abuse and withholding passports to restrict movement.
Sime Darby on Tuesday said that it “continues to engage and co-operate” with United States Customs and Border Protection, which imposed the import ban, “responding to any queries promptly.
“The group also engages with key stakeholders on a regular basis.”