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Malaysian Palm Oil: When trade and politics clash

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Malaysia is the second-largest producer of palm oil in the world and India is the largest buyer and also Malaysia's largest palm oil market for the last five years. It is understandable therefore that the recent restrictions imposed on the imports from the country would significantly hurt it. In today's post, we understand the reasons for India's reaction, the impact on Indian firms, and what is being done by Malaysia to mitigate the damage.

How did it start?

Malaysian Prime Minister Mahathir Mohamad made a statement in the United Nations General Assembly that India had "invaded and occupied Kashmir". He has also openly criticized the Indian government's citizenship law as "grossly unfair" and sheltered fugitives like Zakir Khan (Islamic preacher) who is wanted for alleged money laundering and inciting extremism. India has continued to maintain that the issue of Kashmir is a bilateral one between India and Pakistan.

India had historically imported its refined palm oil from Malaysia and crude palm oil from Indonesia. In light of the comments by the Malaysian premier, India took retaliatory action against the country by effectively banning import of their palm oil. Malaysian palm oil futures fell 10% on the back of the action, the sharpest fall in the last decade.

How is Malaysia trying to mitigate the damage?

While the Malaysian Prime Minister initially tried to demonstrate strength by stating that Chinese imports would help in the background of India's ban, his other comments have been slightly more in touch with reality. The country has admitted that they will not retaliate to India's ban. To the contrary, they have adopted a reconciliatory position by increasing sugar imports from India. MSM holdings, a subsidiary of Malaysia's largest palm oil producer, intends to buy 130K tonnes of raw sugar from India in Q120 vs the 88K tonnes it bought in the whole of 2019 in a move that has been widely seen as a step to improve trade relations.

Which Indian firms stand to win?

Domestic oil manufacturers are the most direct beneficiaries of the move. Patanjali, Adani Wilmar (Fortune), Emami Agrotech are some of the dominant players who will reap a chunk of the benefits. In addition to increased volumes, a sharp improvement in utilization levels should also aid their margin profiles. For an industry that has seen utilization levels plummet from 60% to 40% in the span of the last one year, this comes as welcome relief. The move is also likely to make other oils more attractive which helps Indian firms as well. The benefits to the oil companies, however, will come at the cost of a slightly higher spend for the retail customer.

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