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Slump or New Normal? – European Palm Oil Imports 2021 and Beyond

Adding to the difficulties Malaysian palm oil has been experiencing since 2019 in the European market, COVID-19 made sure that the year 2020 and again the first six months of 2021 were disastrous.

But the pandemic was only one of the influencing factors. This article gives an overview of the year 2021 and takes a peek preview of 2022.

From bad to worse: Malaysian palm oil exports to Europe in the past 18 months

According to numbers reported by industry analyst Oil World, the European Union (EU) in 2020 imported nearly 8.2 million metric tons (MT) of palm oil. Malaysia’s share was roughly 2 million MT.

Just four countries, the Netherlands, Italy, Spain, and Germany, account for between 75 and 80 percent of all EU palm oil imports. However, a look at these countries reveals the extend of the Malaysian malaise.

Malaysian Palm Oil Exports in MT
2019 2020 Diff (Vol) Diff %
Netherlands 880.728 1.072.952 192.224 22
Italy 476.279 439.053 -37.226 -8
Spain 486.658 198.287 -288.371 -59
Germany 35.310 21.462 -13.848 -39
Total 1.880.994 1.731.754 -149.240 -8
H1 2020 H1 2021 Diff (Vol) Diff %
Netherlands 581.902 463.303 -118.599 -20
Italy 220.681 119.807 -100.874 -46
Spain 99.742 40.883 -58.859 -59
Germany 15.377 12.009 -3.368 -22
Total 917.702 636.002 -281.700 -31
EU Total 1.010.539 755.510 -255.029 -25
Source: MPOB

While between 2019 and 2020, Malaysian palm oil exports to the Top 4 dropped by 8 %, a comparison of the first six months of 2020 and 2021 reveals a staggering decline of more than one-third (- 31 %).

For Malaysia, one of the few brighter spots were sales to Sweden. With more than 103 thousand MT in 2020, the country quietly edged into fourth place on the list of the largest EU buyers, after the Netherlands, Italy, and Spain. Again, in the first half of 2021, Sweden bought more palm oil than in the first half of 2020.

Greece recorded the largest increase in import volume, up 271 % for a total of 29,581 MT between January and June 2021 compared to the same period of the previous year. That was mainly due to a recovering economy in which tourism and the HORECA (Hotel/Restaurant/Catering) sector play a prominent role. In combination with a considerable price gap to sunflower in the first half of 2021, palm oil became the country’s preferred choice of edible oils.

However, the entire Union (now 27 countries) fell behind in imports by 25% (see table above). What lies behind this dismal performance?

Pick your poison: Malaysian palm oil sales to Europe under attack from many sides

When searching for an explanation, three broad themes emerge: the pandemic, declining biodiesel demand, and stronger competition from Europe-grown oilseeds. Thus, there may be a perfect storm brewing as there is a demand and supply-side to the equation.

1.    Pandemic

On the supply side, closed borders and travel restrictions kept many migrant workers out of Malaysia and led to labour shortages and a tightening supply of palm oil.

At the same time, domestic as well as international demand suffered from COVID-19 curbs, especially felt in the transport and HORECA sectors.

2.    Biodiesel Demand

There is a close link between palm oil exports to Europe and the fate of biodiesel. For 2021 Oil World estimates the share in total exports for non-food uses to be 65%.

The obvious problem with this dependency is that the EU’s Renewable Energy Directive, known as RED II, eats away at this portion of Malaysia’s palm oil exports.

According to RED II, biofuels with a high indirect land-use change risk (iLUC), i.e., palm oil, are frozen to the consumption level in 2019 of the respective member country – and will be excluded from 2030 at the latest.

France already jumped the gun and excluded palm oil starting January 01, 2020. Austria followed on July 01, 2021. Other member state like Belgium will start the ban from 2023 onwards.

As a direct result of COVID and RED II biodiesel deliveries from Malaysia declined in 2020 compared to 2019 by around 43%, reaching only 476,000 tons. The reduced import volumes from Indonesia and Malaysia were partially offset by biodiesel from other third countries. These include China in particular, which actually supplied more in 2020 than Indonesia and Malaysia combined. Overall, EU biodiesel imports in 2020 declined by over 15%

Source: Eurostat, AMI

For the year 2021 as a whole, things might even be worse. While lower biodiesel imports during 2020 were at least in part a result of a COVID-19 induced drop in demand, this now has a boomerang effect. The European Commission expects imports for 2021 to drop by even 25 % due to large stocks that piled up during the pandemic.

Add to this high palm oil prices leading to less demand from biodiesel producers like Spain, for example.

3.    Competing oils:

According to the EU Commission, soybean cultivation in the EU-27 has more than doubled in the past ten years. According to the data, the area under cultivation in 2021 will be around 958,000 hectares (ha).

That is an increase of around 2 % compared to the previous year. Italy remains the biggest EU producer by a wide margin, with an area expected to reach 286,000 ha and an increase of 11 %, accounting for around 30 % of the total soybean area. Other EU member states have also significantly expanded their land under soybean cultivation. At the same time, the production of sunflower and rapeseed in the first six months of 2021 is also well above the 2020 level.

The only way is up? What the near future has in store

Against this rather bleak background, the pressing question is: will things take a turn for the better anytime soon?

Of course, no one has a crystal ball to find the answer. And in unstable times like these, predictions are tough to make. That said, several factors seem to work against a speedy recovery.

For one thing, the United States Department of Agriculture (USDA) projects palm oil prices to rise further in H2 of 2021. All else being equal, that would translate into lower demand. For Malaysia, the USDA expects a drop in palm oil exports of 300 thousand MT for 2021, primarily due to lower production.

And again, a lot hinges on what happens with biodiesel. It is expected that much of the European region, which is seeing strong vaccination drives, a return to “normal” pre-pandemic travel and economic activity is in the cards. With that, biofuel consumption would recover. Also, higher blending mandates across the region may have a positive effect.

But will that help palm oil? If the rules laid down with RED II remain unchanged, most observers think not. As more and more member states decide to phase out palm oil early, industry sources predict palm oil consumption to nose-dive even before 2030.

In July 2021, the EC tabled new legislative proposals collectively known as “Fit for 55,” pointing to the European ambition to cut greenhouse gas emissions by 55% until 2030. The press has referred to the Commission’s initiative as “legislative tsunami” and “epic battle over the climate.”

A part of Fit for 55 is a review of RED II. What is known thus far is that environmental NGOs like Transport & Environment lambast the review for not adapting RED II to phase out palm oil in biofuels with immediate effect. But neither has the review given any signs of hope that the phase-out may be reconsidered.

But be that as it may, numerous and formidable challenges remain for palm oil in Europe. As the e-revolution unfolds, carmakers like Volkswagen and Volvo announce to manufacture only battery-powered vehicles soon – Volvo commits to 100 % as early as 2030. Thus the fate of biodiesel, whether made with palm oil or anything else, appears to be sealed.

Add to that other challenges like an EU Action Plan on Deforestation, retailers initiatives like no-palm oil labeling, legislation on sustainable supply chains, or the EU Farm to Fork policies. It is a hard pill to swallow, but Malaysian palm oil stakeholders should buckle up for an ongoing bumpy ride.

Prepared by  Fazari Radzi  and Uthaya Kumar 

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