For Palm Oil, there is a Europe Beyond the EU

Trouble in the South China Sea. International concern over China’s Belt and Road Initiative (BRI). Globally, increasing economic nationalism because of Covid-19.

The world has become a dangerous place, and Malaysia would be well-advised not to turn a cold shoulder to Europe. But that does not necessarily mean turning the other cheek to the EU, either. This article explores a third option.

In a world like this, everyone needs friends

China’s BRI has raised eyebrows in many countries. Some fear a China that is becoming too strong, and others see the danger of being caught in ‘debt traps’ through lopsided contracts with Chinese counterparts.

In response to these concerns, Malaysia suspended work on a BRI train project and resumed only after contract costs were reduced by almost one-third. Taking a more drastic step Australia in April 2021 left the BRI initiative altogether, much to China’s chagrin.

That same month China’s National Development and Reform Commission warned of political risk in other participating countries.

The EU, for its part, mindful of its waning power on the international stage, has set in motion several initiatives aimed at improving relations with several Asian nations under what it calls “EU-Asia Connectivity.” In light of China’s overwhelming bargaining power and the EU’s search for allies, it does not appear to be in Malaysia’s best interest to slam the doors to Europe shut.

Likewise, disappointment with China has been building in Central and Eastern Europe because of the “17+1” format of cooperation between China and 17 CEE countries. It was initially devised to make BRI a success in the region but now is considered by many nothing more than a zombie mechanism.

Is this a window of opportunity for Malaysia?

Opening new doors without shutting old ones

Given the strong headwinds palm oil has experienced in Europe – and more precisely in the European Union (EU) – over the past decade or so, it is only sensible for the Malaysian palm oil industry to look for a Plan B.

In search of opportunities, consider new geographies and market segments. An example of the latter would be to refocus European sales on palm oil as food instead of as a biofuel, which accounted for more than 50% of EU sales as of late. However, that market is disintegrating due to EU regulations.

In terms of geographical focus, it can help stop thinking in standard categorizations like Europe and Asia. For instance, depending on the definition used, Russia west of the Ural Mountains is geographically, if not culturally, considered to be a part of Europe.

Likewise, Turkey with East Thrace (also known as European Turkey) reaches into what is usually called South-Eastern Europe, sharing cultural roots with the region since the Ottoman Empire.

European Turkey comprises around 14% of the country’s total population. Istanbul, straddling the Strait of Bosporus, the only passage between the Mediterranean and the Black Sea, is located on Turkey’s European and Asian parts.

Thus, when thinking outside the geographer’s box, a five-country region (“G5”) with more than 160 million consumers emerges.

Population in million people

Source: Wikipedia

In assessing the market potential, consider two aspects:

  1. Palm oil food sector: Although the region’s dominant oil is sunflower, the past has shown that fluctuations in regional production can provide opportunities for palm oil. In addition, price may be working in palm oil’s favor.
  2. Palm oil energy sector: Out of the five countries, Turkey and Ukraine do not belong to the EU and are thus not bound by the Union’s Renewable Energy Directive (RED II), which will phase out palm-based biofuels by 2030.

Palm Oil Imports 2019 in `000 metric tons

Source: Oil World Annual 2020

In addition to market size, the logistics infrastructure and geographic location make the “G5” an attractive destination for palm oil exports. The ports include Istanbul (Turkey), Piraeus (Greece), Burgas (Bulgaria), Constanta (Romania), and Odessa/Yuzhniy (Ukraine).

Istanbul is strategically situated at the Bosporus, the only connection between the Mediterranean and the Black Sea. Constanta was already considered by Malaysia as a potential gateway for palm oil in Eastern Europe back in 2012.

However, currently the most dynamic location appears to be Odessa. Headquartered in Singapore, Wilmar International has already been operating an oil handling and processing complex in the port of Yuzhniy (about 35 kilometers outside Odessa) under the name of Delta Wilmar for years. Lately, the company has considerably stepped up its activities there. In 2019 Wilmar acquired the leading consumer brand in Ukraine, Chumak PJSC. Chumak sells wide range of products such as: Tomato Paste, Ketchup, mayonnaise, pasta, condiments sauces and RSFO in bottles.

Conclusion

In light of several policy initiatives and regulations detrimental to the interest of palm oil in recent years, Malaysia’s frustration with the EU is understandable.

However, given global political and economic realities, it appears that Malaysia has to gain more by keeping doors to Europe open rather than burning bridges to the continent.

In doing so, Malaysia may choose to follow a two-pronged approach by, on the one hand, continuing to fill the demand coming out of the EU while at the same time actively trying to stimulate the markets in Europe’s far east.

For that, an unconventional definition of what Europe is may make sense. That definition would include, among others, Turkey and Ukraine. Recent sales figures from both countries demonstrate a growing interest in palm oil on the consumer and the industrial customer side. Almost all of the more than 600,000 tons of palm oil sold to Turkey in 2019 come out of Malaysia.

Finally, considering the favorable geopolitical location of several commercial centers in the region like the Black Sea port in Odessa (Ukraine), the feasibility of establishing a distribution and processing hub somewhere in that region should be studied.

That may be a way for Malaysian palm oil to access new markets in Europe’s east without losing old ones further west.

Prepared by  Uthaya Kumar and Mohd. Izham Hassan

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