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Opportunities  for Malaysian Palm Oil Players in China

Import of Palm Oil Recovered in 2023 but Below Expectation

Import of palm oil in China for the year 2023 rebounded significantly from 2022. From 4.94 million MT recorded in 2022, the palm oil import volume surged by 14.0% or 693,000 MT to 5.64 million MT in 2023.  Nevertheless, last year’s import volume was far from the 6.46 million and 6.38 million MT recorded in 2020 and 2021, and MPOC’s forecast of 6.11 million MT (published in the October 2023 issue of Palm Pulse magazine).

Table 1: Annual Import of Palm Oil in China (2019-2023) (‘000 MT)

Origin

2019

2020

2021

2022

2023

Change (%)

2023 vs 2022

Indonesia

5,253.2

3,746.7

4,700.6

3,351.1

4,286.4

27.9%

Malaysia

2,284.5

2,698.8

1,668.4

1,589.4

1,345.3

-15.4%

Other

14.3

16.0

8.1

3.4

5.4

57.2%

TOTAL

7,552.0

6,461.5

6,377.1

4,943.9

5,637.1

14.0%

Source: Chinese Customs

Further assessment of the fractions imported by China shows that both RBD Palm Olein (PL) and RBD Palm Stearin (PS) remain the major fractions imported, accounting for 99.5% of total palm oil imported under the HS code 1511. As shown in Table 2, we can see that the lower-than-expected growth of palm oil import could be attributed to the lower growth of PL import volume, where its import volume was 300,000 MT lower than 2020 and 2021’s volume respectively, despite the growth of 27.1% against 2022 level.  However, the major contributing factor to the lower growth of the total PO import was the drop in PS import, where import volume extended its downtrend in 2023 to only 1.31 million MT, a drastic drop of 15.1%.

Table 2: Palm Oil Import by Products in China

Products

2019

2020

2021

2022

2023

Change (%)

2023 vs 2022

PL

5,532.3

4,606.8

4,620.1

3,386.0

4,304.4

27.1%

PS

1,939.2

1,805.5

1,725.3

1,537.2

1,305.2

-15.1%

CPO

49.3

15.7

0.1

2.1

0.0

-99.0%

Other PO

31.2

33.5

31.5

18.6

27.5

47.3%

TOTAL

7,552.0

6,461.5

6,377.1

4,943.9

5,637.1

14.0%

Source: Chinese Customs

Being the most price-competitive and versatile vegetable oil, it would be logical that the demand or consumption of palm oil increases in tandem with the total demand of oils & fats in any particular net importing country. In this case, the total consumption of oils & fats in China grew by 5.7% or 2.26 million MT y-o-y, from 39.68 million MT to 41.94 million MT last year, which is also higher than the 40.90 million and 41.80 million MT of oils & fats consumed in 2020 and 2021 respectively.  In other word, the demand for PO was unable to recover and at the same time grow in tandem with the total oils & fats consumed in 2023, as the significant growth witnessed on the import of PL was merely just a partial recovery of the market share that lost to other competing oils and fats in 2022 when Indonesia banned the export of palm oil in Q2 of 2022.

While one would think that the demand for PL was being affected by the increased supplies of soybean oil (SBO) (import+output increased by 750,000 MT), the price discount of PL against SBO was at an average of RMB1,074/MT in 2023, against the premium recorded in 2022 at RMB212/MT.  This indicates that there is/are other competing oil(s) that might have impacted the PL demand.

Besides the lower-than-expected recovery of PL import, the decline of PS’s import for the 4th consecutive year in China also contributed to the lower import growth in China’s total palm oil import in 2023, especially when the catering sector’s revenue recorded a strong recovery with an increase of 20.4% y-o-y.

So, what could be the contributing factors to these phenomena?

Factors Contributing to the Lower Growth

a. Recovery of Rapeseed Oil and Sunflower seed Oil Supplies in 2023

Due to the bumper harvest of rapeseed and sunflower seed in Canada and Ukraine/Russia in the 2022/23 marketing year, the supplies of these 2 oilseeds and oils to the world market increased substantially.  This has led to the recovery of rapeseed, rapeseed oil, and sunflower seed oil imports in China last year (Table 3). Total supplies of locally produced and imported rapeseed oil jumped significantly by 22.8% and 90.4% y-o-y respectively, while the import of sunflower seed oil surged 176.0% in 2023. These brought the total supplies of rapeseed oil (RSO) and sunflower seed oil (SFO) to 8.48 million MT, an increase of 51.3% or 2.88 million MT against the volume recorded in 2022.

Such a drastic jump in the supplies of these 2 types of soft oils eroded the market share of other oils & fats, which in this case has also limited the increase of PO demand and import in the same year. 

Table 3 – Supplies of Rapeseed Oil and Sunflower seed Oil in China (2022 vs. 2023)(‘000 MT)

Veg Oil

Source

2022

2023

Change (Vol.)

Change (%)

Rapeseed Oil

Local Output

3,629

4,458

829

22.8%

Rapeseed Oil

Import

1,061

2,020

959

90.4%

Sunflower seed Oil

Local Output

307

329

22

7.2%

Sunflower seed Oil

Import

605

1,670

1,065

176.0%

TOTAL supplies

 

5,602

8,477

2,875

51.3%

Source: Oil World

b. Ongoing Substitution of PL and PS by Shortening and Hydrogenated Palm Stearin

Import of shortening and hydrogenated palm stearin (HPS) in China has recorded a significant jump since Indonesia adjusted its palm products export levy and duty structure in January 2021, and coupled with the duty-free imposed on these 2 products under the ASEAN-China FTA agreement, these products became very competitive in price since 2021.

According to the data released by Chinese Customs, the import of shortening jumped significantly since 2021 (Chart 1). Last year, the total import of shortening amounted to 1.03 million MT, an increase of 30,000 MT from 1.00 million MT recorded in 2022. What is more important is that instead of being used in the bakery sector, the majority of these shortenings imported by China were mainly meant for food and non-food processing sectors with most of them being sold as frying shortening with different melting points.  Hence, these shortenings have the same physical properties and function as various palm fractions shipped in bulk, and being applied as ingredients or feedstock in products such as hotpot soup stock, instant noodle frying, and candle wax production, to partially replace PL and some volume of PS.

Although the delivery of shortening involves additional costs on processing and packaging as compared to the bulk, the discount of the product cost (shortening) against PL was so attractive that it was able to offset the additional packaging cost and still cheaper than PL. Furthermore, boxes or drum packaging are preferred by small manufacturers as most of them do not have or are not willing to put up storage tanks to stock oils delivered by tankers.   

This led some Chinese users to switch from bulk to carton delivery as the discount is huge enough to spend an additional cost to hire manpower for unpacking the shortening and also the skin-lost while unpacking, subsequently leading to a sharp increase in shortening import in 2021. 

Chart 1 – Annual Import of Shortening in China (2019-2023)

 Source: Chinese Customs

Since most of the increase in shortening imported by China is meant to substitute PL and PS, it could be deduced that, after excluding the shortening that was designated for the bakery sector at 300,000 MT per annum, there is an estimated 730,000 MT of shortening imported in 2023 were used to replace PL and PS.  If taking into account the import volume of shortening that went into general food applications which partially substituted PL demand, the total palm oil that has gone into food application in 2023 was estimated at 5.04 million MT, an increase of 941,500 MT from the total import volume of shortening (for food processing) and PL (Chart 2).

Chart 2: Import of PL and Shortening in China (2019-2023)

Source: Chinese Customs

Similar to shortening, it was noticed that the import volume of hydrogenated vegetable oils has been maintained at slightly below 120,000 MT between 2017 and 2020, indicating that the demand for this product is rather matured until it jumped significantly in 2021 by close to 150,000 MT, or 130%, and subsequently increased by 288,000 MT in 2022.  In 2023, the import of hydrogenated vegetable oil increased by a whopping 253,000 MT and ended the year with a total import of 805,500 MT. 

Further clarification sought from the industry sources indicates that the increase in hydrogenated vegetable oils (HS Code 1516.2000) was mainly hydrogenated palm stearin (HPS) from Indonesia.  This palm product is being used by the oleochemicals industry as feedstock in substitution of PS to produce stearic acid and glycerine, as there is no import duty for this product under the ASEAN-China FTA, as compared to the 2% import duty for PS imposed by China.  Hence, coupled with the duty-free export status of HPS, the product is far more competitive in terms of price against PS.

Chart 3 – Annual Import of Hydrogenated Vegetable Oil in China (2018-2023)

Source: Chinese Customs

As highlighted earlier, according to the historical import data before 2021, the hydrogenated vegetable oil imported by China was estimated at 120,000 MT per annum, which is mainly cocoa butter substitutes and other specialty fats declared under the HS Code of 1516.2000.  Hence, it could be deduced that the import of HPS from 2021 onwards is equivalent to the total import of hydrogenated vegetable oil minus 120,000 MT.  Subsequently, the import of HPS is estimated at 150,000 MT, 430,000 MT, and 685,000 MT respectively for 2021, 2022, and 2023.

Hence, if we sum up the total PS and HPS being imported by China in 2023, we could witness that the demand or import of the oleochemical feedstocks did not decline (Chart 4). Nevertheless, we can see from the chart that the total import volume (PS and HPS) in 2023 was almost unchanged from 2022, indicating that the oleochemicals sector was rather stagnant. According to the market intelligence gathered from the industry players, most claimed that the margin was very bad in 2023, partly due to the property market crisis, and led to the slowdown of the oleochemicals (mainly stearic acid) demand from the plastic products sector in China.

Chart 4: Import of PS and HPS in China (2017-2022)

Source: Chinese Customs

So, if we sum up the import volume of PO under the HS Code of 1511 which includes PL & PS, and shortening and HPS, the total import of palm products for industrial application is estimated at 7.05 million MT, an increase of 971,500 MT from the 2022 level. This volume is also very close to the 7.08 million MT recorded in 2021, and higher than 6.62 million MT recorded in 2020.  This shows that the actual demand for palm oil or palm products from industrial applications wasn’t affected much by the increase in the supplies of soft oils due to the price competitiveness.  

Chart 5 – Total Import of Palm Products (2019-2023)

Source: Chinese Customs

Outlook of Palm Oil Demand in 2024

Economic and Population Situation Remain the Prime Factors in Demand Growth

Despite some issues with regard to the property sector’s development, China’s economy was able to record a GDP growth of 5.2% in 2023, a strong recovery from the 3% growth recorded in 2022, the years when the country’s economy was affected by frequent long-period lockdown in multiple cities throughout the year.

For 2024, various forecasts were given by major organizations/institutions such as IMF, Bloomberg, and Morgan Stanley on the GDP growth which ranged from 4.2% to 4.9%, while the Chinese Academy of Science has forecasted a 5.3% growth in China’s 2024 GDP. 

According to the observation by author, the oils & fats demand in China has been growing at an average rate of 750,000 MT per annum since China’s GDP growth dropped below 9%. Hence, based on the forecast given on GDP growth in 2024, the oils & fats demand is expected to also grow at 750,000 MT against 2023‘s volume.   This growth rate is further made possible by the fact that China has just experienced a second consecutive year of negative growth in population in 2023, which dropped by 2.08 million, higher than the drop recorded in 2022 at 850,000.  This has been seen as the start of the slowdown in China’s population and hence, 2024 will see at least a no-growth situation if not another year of drop in population.

Government Policies Play Roles in Types of Oils to Supplement the Growth

Ongoing efforts by the Chinese government to lower the reliance on imported soybeans for the supplies of plant protein to feed the livestock have also caused slower growth in soybean crushing, which led to slower growth in SBO output. According to the Chinese government’s oils & fats think-tank agency, China National Grain and Oils Information Centre (CNGOIC) estimated that the crushing volume of soybean will be at 98.90 million in 2023/24, an increase of 2.1 million MT y-o-y, which is far lower than the growth recorded in 2022/23 at 5.3 million MT.

With the slower growth in soybean crushing, this will be translated to a total of 18.79 million MT of SBO being churned out in China market, only growing by 400,000 MT.  This will only be able to satisfy not more than 40% of the total growth in oils & fats demand forecasted at 1.08 million MT in the same year (Oct 23/Sep 24).  Nevertheless, the agency forecasted that the PO demand in the same year will experience no growth due to the increase in supplies of RSO and SFO in the same year.  This situation is possible but is only confined to the import of PO under the HS Code of 1511. As highlighted earlier, some of the demand for PO has been switched from the conventional palm fractions of PL and PS to shortening and HPS, and it is expected that demand for shortening and HPS will stay firm if not growing by another 100,000-200,000 MT, this will translate into either same or additional import of 100,000-200,000 MT total palm products in 2024 y-o-y. The subsequent factor explains why the growth of

CPO Output Will Decide the Supply-Demand Balance of PO

However, the key factor for any growth in PO and palm products demand and import in China is also very much dependent on the CPO output in both Malaysia and Indonesia this year.  According to Oil World, the CPO output forecasted for 2023/24 would be at 81.66 million MT, with only 200,000-300,000 MT growth from the previous year (2022/23).   This will surely limit the additional volume available for export markets, especially when Indonesia is expected to increase its PO domestic consumption due to its B35 policy. According to Oil World, the consumption of PO in Indonesia’s biodiesel sector alone in 2024 will increase by 450,000 MT. This will subsequently affect the competitiveness of palm oil in the global market, especially those price sensitive countries including China.  What’s more, with both Indonesia and Malaysia CPO outputs forecasted to drop by 200,000 MT respectively against 2023’s production, it will further limit the availability of palm products to be exported to the world market including China. 

However, the sharp growth domestic demand for PO in Indonesia which coupled with the drop in CPO output will ultimately affect the export volume of PO from Indonesia, as the supply-demand imbalance will affect the price of competitiveness of Indonesian PO.  This is seen as an opportunity for Malaysian exporters to capitalize on recapturing some market share from Indonesia in 2024.

Prepared By:  Desmond Ng

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