Yesterday it looked as though work at Malaysia’s palm oil plantations was to be suspended until the end of March, following the government’s decision to restrict internal movement.
Palm oil futures in on the Malaysia derivatives exchange rose by as much as 5.42%.
Today, the commodities’ minister says that palm oil plantations are exempt from the restricted movement order, according to Nageeb Wahab, the chief executive of the Malaysian Palm Oil Association.
Today the same June-delivery palm oil contract closed down by 0.44% at the equivalent of $512.76 per tonne.
Self-interest and commonsense
We should give ’three cheers’ to this rational decision by Malaysia’s commodities’ minister.
Obviously, it is a self-interested move - a suspension of palm oil plantation work could have sliced as much as 700,000 tonnes from Malaysia’s production. The country’s stocks of palm oil have declined to 1.68m tonnes, the lowest since mid-2017.
But it is also a significant triumph over hysteria.
The fall-outs from the Covid-19 virus are proving to be potentially more life-threatening, on a society-wide scale, than the virus itself. As of today, Malaysia has had 790 cases of Covid-19 infection and two deaths.
Avoided supply shock
India will be relieved at Malaysia’s decision to keep its palm oil plantations open - especially now that relations between the countries seem to be recovering.
India consumes around 1.5m tonnes of edible vegetable oil a month, more than 80% of that imported. Last year it imported almost 10m tonnes of palm oil.
Malaysia is the world’s second-biggest palm oil producer. The biggest, Indonesia, has not yet made public any decision on what it intends doing regarding its plantations, but given that Malaysia has already cut its export tax on palm oil from 6% in March to 5% for April, the betting must be that Indonesia keeps its plantations open for work too.
As crude oil prices sustain their slide - Goldman Sachs is now estimating an average second quarter price for Brent crude of $20 per barrel - biodiesel (of which palm oil is in many places, not least Malaysia, a key ingredient) prices will suffer too.
The global demand shocks are coming thick and fast - the world needs to avoid supply shocks wherever possible.