Permit ban by Indonesia will worsen CPO suplly, food may become expensive

PETALING JAYA: A ban by Indonesia on new permits for palm oil companies will further fuel an impending shortage in supply of the commodity.

The proposed moratorium is part of the country’s efforts to reduce the industry’s impact on the environment.

“If this ban is imposed, we will see a critical shortage in supply, leading to high prices, making food more expensive. Major palm oil consumer countries including Indonesia, India and China will be affected.

“Even without the moratorium, we are already headed towards a supply shortage due to weather phenomenon like El Nino,” said industry expert M.R. Chandran.The average production growth rate for palm oil, he said, was between 1.5 and 2.5 million tonnes per year.

“This year, we can expect to see a deficit of between 700,000 and 900,000 tonnes, and this is why we can see prices remaining high,” he added.

Chandran said Indonesia, which had about 10.6 million hectares of palm oil plantations, had earlier proposed to increase the planted area by between 13 and 14 million hectares by 2020.

“The only way to avoid such a shortage is by expanding the planted areas, but of course this needs to be done sustainably.

“A total moratorium, however, will be damaging in the long term,” he said.The moratorium, announced by Indonesian president Joko Widodo on Thursday, is part of the world’s biggest palm oil producer’s efforts to reduce the industry’s impact on the environment.

According to reports, the Indonesian president said the current permits that had been given out to palm oil companies were “sufficient” and that productivity could be doubled through better techniques and seeds.

“They can no longer ask for concessions for palm oil (or) mining,” he said, without providing a timeline for the ruling.

A government official added that Indonesian palm growers were “a long way behind those in Malaysia” in terms of productivity.Chandran, however, said improvements to yield in the palm oil industry had been minimal.

The world average for palm oil yield is 3.7 tonnes per hectare, while Malaysia’s average is about 4 tonnes per hectare.

“If we had significant improvements to yield, by at least 1% a year, it would help, but we are not seeing this happen.

“Yields have been stagnant at between 3.8 tonnes and 4 tonnes per hectare in Malaysia for the past 20 years, despite all the research and development and good management,” he said.

He said the labour shortage in Malaysia also made it more difficult for palm oil firms here to boost productivity.

CIMB Investment Bank Bhd analyst Ivy Ng does not expect the moratorium to have much impact on the industry in the short term.

“Assuming this does not affect existing permits, I would say the impact on new plantings, which have already slowed down in recent years, are not significant in the near term.

“But we need more clarity on this to make a conclusive analysis on the impact,” she said.

HLIB Research analyst Chan Yuan She also expects minimal impact on palm oil production due to an existing ban on the clearing of primary forests and peatlands since 2011.

A previous moratorium by the Indonesian government, which bans new permits on developing natural forest, extends until 2017.She said the bigger threat towards oil palm production is the impending La Nina phenomenon, which will bring heavy rainfall and possible flooding.

This, she said, would affect production in the immediate term as it would slow down the harvesting process and delay in transportation.

“Also, it could affect the pollination and photosynthesis of oil palm trees as well as fresh fruit bunch production six months after heavy rainfall. La Nina events usually have a greater impact on soybean production in the US and South America.

“As both soybean oil and CPO prices are positively correlated, lower soybean production will boost soybean oil prices, causing a spillover effect to crude palm oil (CPO) prices,” said Chan.She said CPO prices were expected to remain high in the second quarter of the year, supported by weak production in the first half, before a recovery in the second half of 2016.Last month, palm oil expert Dr James Fry said said global production could fall by over two million tonnes this year due to the El Nino phenomenon and further declines of 0.4 million tonnes may occur due to La Nina during the third and fourth quarter

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