Ukraine war benefits Malaysian palm oil, but foreign worker shortage curbs production output

Malaysian palm oil exports could see a prolonged lift as the Russia-Ukraine war drags on indefinitely, observers say, as the likes of India and the European Union secure alternatives to sunflower and rapeseed oil no longer available from Ukraine.

A prominent geopolitical risk forecaster suggested the conflict - now in its second month - could drag on for 15 years, likening it to the civil strife in Syria.

Data released this week by the Malaysian Palm Oil Board showed exports of the commodity from the Southeast Asian country to the European Union surged 48.3 per cent in March compared with February.

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"One notable bright spot was the strong exports to the EU, with palm oil demand rising to fill in the shortage of sunflower and rapeseed oils from Russia and Ukraine," said Public Investment Bank (PIVB) in a report released on Wednesday.

In India, the Solvent Extractors' Association of India (SEA) said Indian palm oil exports jumped 18.7 per cent. Malaysian palm oil exports to India rose 20.8 per cent in March 2022. Experts said the shift towards palm oil by India, the world's largest importer of edible oils, was very likely to help Malaysian exports too.

Chong Hoe Leong, a commodities analyst with PIVB, said EU members the Netherlands, Spain and Italy were expected to buy more palm oil as they were "normally the big palm oil countries".

Brokerage firm UOB Kay Hian said in a note that alongside the EU, countries in Central Asia and the Middle East had also increased palm oil imports.

Some countries with high sunflower oil usage increased their palm oil imports by 100 per cent in March, due to supply shortages from the Black Sea tensions, the note added.

Malaysia, the second largest palm oil producer after Indonesia, has in the past locked horns with the EU for its imposition of anti-palm oil measures - including classifying the commodity as having a high risk of displacing food crops.

Last year the government filed a complaint with the World Trade Organization, charging that the EU's actions contravened the global body's rules of engagement.

Likewise with India, a diplomatic rift between New Delhi and the then Prime Minister Mahathir Mohamad in 2020 saw the South Asian power temporarily suspend imports of refined palm oil. Indian buyers resumed buying Malaysian palm oil last year.

Despite the buoyancy in demand, expectations are that Malaysia will not be able to immediately increase its palm oil production owing to a severe shortage in manpower.

About 80 per cent of Malaysia's plantation workers are migrants, with most coming from neighbouring Indonesia.

The broad closure of borders during the Covid-19 pandemic seriously impacted the flow of these workers.

Plantations typically harvest palm oil fruit once every 10-14 days. But with the labour shortage, many small plantations are only harvesting the fruit once a month.

The country is expected to hire nearly 180,000 workers over the next six weeks, according to Human Resources Minister M. Saravanan. A special committee will meet daily from April 15 to speed up the approval process, state news agency Bernama reported on Wednesday, citing Plantation Industries and Commodities Minister Zuraida Kamaruddin.

Chong, the commodities analyst, said the industry had a shortage of 75,000 harvesters.

In 2021, Malaysia produced 18.1 million metric tonnes of crude palm oil down from 19.1 million in 2020.

"The labour shortage impacts on 10-15 per cent of palm oil production. I am looking at 19.5 metric tonnes production for 2022," said PIVB's Chong.

Big plantation companies managed to harvest more than once a month by appointing contract workers during peak production periods, and redeploying high performance harvesters to high yield plantations, said Chong.

The owner of a small palm oil plantation told This Week In Asia his farms have a manpower shortage and only harvested the fruit "once a month most of the time" the past two years.

On Monday, crude palm oil traded at RM6,526 (US$1,543) per metric tonne.

Analysts expect the price to stabilise later in the year.

"I am looking at a price level of RM4,300 per tonne for 2022. Current price is toppish, in my view," said Chong. UOB Kay Hian forecast 2022 crude palm oil price at RM4,200 per metric tonne.

The prospects for Malaysian palm oil could also be determined by how much edible oil EU nations buy from Russia, whose global pariah status has been increasing since it invaded Ukraine.

EU representatives in Malaysia said there were currently no private sector restrictions on purchasing commodities from Russia.

"In general, EU countries are characterised by liberal economies with little state intervention in the markets and where prices are based on the free interplay of supply and demand," said a spokesman of the Delegation of the EU to Malaysia.

As for the concerns of the environmentalist lobby in the EU about the negative effects of palm oil, this was also unlikely to be a short term issue for Malaysia, going by the comments of experts and the EU representative.

James Fry, a commodities expert and chairman of the agribusiness consultancy LMC International, said for now the EU and British governments had given sellers of foodstuffs leeway in how they label oils in their products, without necessarily identifying palm oil as an ingredient.

The EU spokesman said the bloc's legislation currently does not require nor regulate any description indicating that a certain ingredient is absent from certain products, such as, "no palm oil".

Individual manufacturers can however, voluntarily indicate that a certain ingredient was not used, the spokesman said.

In the longer term, all eyes will be on how long the Ukraine war will last.

"Obviously this is an estimate but conflicts in Syria or civil wars have lasted 10 to 15 years. There is no reason why Ukraine would be any different, unfortunately," Olivier Guitta, London-based managing director of GlobalStrat, an international security and geopolitical risk consultancy firm, told This Week In Asia.

"Even in the now unlikely case that Russia can take over the whole country, the resistance from the Ukrainians in the cities would turn the conflict into urban warfare a la Syria," Guitta added.

Guitta believes a prolonged battle in Ukraine is inevitable, despite the growing sanctions affecting Russia's economy, because President Vladimir Putin won't be satisfied until he achieves his ultimate goal - to "restore the great Russia."

Additional reporting by Reuters, Bloomberg

This article originally appeared on the South China Morning Post (SCMP).

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