China Lifts Malaysian, Indonesian Palm Oil Sales

Consumption of palm oil by its No. 1 importer is expected to jump as rising global demand hikes prices for the cheapest of the edible oils

At an oil palm estate near Melaka Town in peninsular Malaysia, the harvesters are winding up the day. The Regent Estate, owned by IOI Corporation, employs around 300 workers in all. With the sky turning dark and little shelter out in the plantation, the harvesters hurry to avoid being caught in a tropical downpour.

One harvester, a Bangladeshi national, cuts down a final bunch of fruit from a palm. He swings his sickle—modified with an elongated, four-meter-long handle—and a cluster of yellowish-orange palm oil fruit falls from the tree. It hits the ground with a heavy thud.

Once these fruits are crushed and refined into palm oil, there is a good chance they will end up in China. IOI exported 230,000 tons of palm oil products to China last year, accounting for 6% of Malaysia's total palm oil exports to the country. Malaysia itself is responsible for 40% of world palm oil output.

The versatile commodity is used as cooking oil, in food and cosmetics processing, and myriad other industries. China, perhaps unsurprisingly, is the world's biggest importer of palm oil.

"If we look at the major importers, China has been number one for many years," said Ivy Ng, who researches palm oil plantation stocks at investment bank CIMB in Kuala Lumpur.

Palm oil, traditionally unglamorous, has lately become a hot commodity. According to investment bank Credit Suisse crude palm oil prices rose 38%—from US$917 a ton to US$1,265 a ton—over a 12-week period from the start of December. There haven't been highs like this since 1998.

China is a key driver of these towering prices. The disastrous snowstorms this winter mean the spring rapeseed harvest will likely be poorer than planned. Rapeseed is a major source of edible oil in China, and palm oil imports are expected to make up the difference. At the same time, broader trends, like China's increasingly wealthy population, also mean individuals are consuming more oil than before.

"China was consuming a very low amount of edible oil per person compared to some of the more developed countries," Ng said. "But over the past few years they've been catching up."

Increasing demand from China isn't the only reason for palm oil's current popularity. Demand is rising across the developing world while biofuel policies introduced in developed countries are another contributing factor. In Europe and the US, the commodity is a substitute for rapeseed and other edible oils, which are increasingly being used for fuel purposes.

Of the 17 types of edible oils and fats that are traded globally, palm oil remains the cheapest, going for US$300 less than soya oil, according to Credit Suisse.

The rivals

Palm oil's great rival in China is soybean oil, which is mainly imported from South America. China is the world's biggest soybean importer, buying 33.5 million tons last year, a CLSA report said. Soybean oil occupies 37% of the edible oils market in China, according to research firm Beijing Agribusiness, compared to palm oil's 21% share.

But palm oil has momentum on its side. In 2002, it overtook rapeseed oil to gain its current second-place position in terms of market share.

"Traditionally, the Chinese market is a big market for rapeseed oil; probably 15 years ago rapeseed oil was the number one oil, followed by soybean and then palm. But today the relationship has changed," said James Zhou, who heads Cargill's grain and oilseed supply chain unit in China.

History lessons

The fact that Southeast Asia and China are linked by palm oil is a quirk of geography and history. The plant is native to West Africa, and was first transported to Indonesia by the Dutch. In 1917, the first oil palm plantation was established in what is now peninsular Malaysia.

The Dutch transplantation turned out to be a felicitous move. According to Tan Teck Hock, an agronomist at IOI, oil palms grow best within five degrees latitude of the equator, and in areas with evenly distributed and heavy rainfall. Malaysia and Indonesian Borneo, in particular, with vast expanses of rainforest, were ideal candidates for plantations.