Taking the fork in the road: time for Malaysian palm oil to rethink Europe

US- baseball star Yogi Berra, who retired in the mid-1960s, is famous the world over for his weird aphorisms, known as Yogiisms. One of them states: “If you come to a fork in the road, take it!”

In many ways, this seems to aptly describe the situation palm oil is facing in Europe. After decades of handsomely growing demand, the European Union already more than a decade ago (when the Renewable Energy Directive, RED, came into force) starting slamming on the brakes.

An entire lineup of environmental and trade-related legislation was thrown at palm oil from EU and national lawmakers. In the process, they redefined old and invented new analytical tools like the mouthful “Indirect Land Use Change” (ILUC).

Sustainability certification became a moving target and now, to some producers, seems more of an unattainable mirage than an objective standard. European politicians, celebrities, and NGOs threw in their weight in a supposedly noble struggle to save the orangutan.

All the while, palm oil sales and prices suffered.

What did Malaysia do in the face of all this? It tried to fight back the best it could. Diplomatic missions to the EU, communication campaigns, and above all, the development of the MSPO – the mandatory Malaysian Sustainable Palm Oil standard attest to that.

And yet, the fact remains that by the year 2030, over half of all palm oil sold to the EU will effectively be banned from that market. Malaysian palm oil and Europe have come to a crossroads. Time to rethink the Malaysian strategy in Europe.

This article introduces three possible venues. But first, let us look at some numbers that show where we stand.

Riding into the sunset: Biofuels (and the combustion engine) are the past

At first glance, palm oil sales to the EU were a big success over the last 20 years (see Figure 1). According to Oilworld December 2020, around 8.3 M MT, roughly 3 times the volume of the year 2000 (2.8 M MT).

Figure 1

However, a look at annual growth rates (Figure 2) shows that business has been more or less flat since 2013. Two underlying trends explain these numbers: first, the early growth spurt of palm oil for biodiesel, and second, the perennial decline of palm oil as food.

Figure 2

Source: index mundi; European Union (EU-27) Palm Oil Domestic Consumption Annual Growth Rate

Numbers of the USDA (Figure 3) coincide with the flattened growth curve in Figure 2: between 2011 and 2013, biodiesel palm oil experienced a strong expansion and since then has stagnated more or less.

The early push followed the original Renewable Energy Directive in 2009 (RED 2009/28/EC) that set mandatory goals for biofuels used in the EU transport sector.

At the same time, the use of Used Cooking Oil (UCO) grew more than fourfold between 2011 and 2019, suggesting a certain crowding-out effect vis-a-vis palm oil.

Figure 3: Feedstock Use for Biodiesel and Renewable Diesel (HVO*) in `000 MT

* Hydrogenated Vegetable Oil; ** Used Cooking Oil
Source: United States Department of Agriculture (USDA), Biofuels Annual, June 29, 2020

Numbers based on Oil World statistics show different absolute values but do confirm the trend noted above.

Figure 4

More significantly, though, projections until the year 2030 that factor in the phasing out of palm oil in biofuels due to the reformulated Renewable Energy Directive (RED II) show what the future may hold: an EU palm oil consumption basically cut in half compared to the year 2021.

Figure 5

Malaysia must now deal with the realities at hand. Palm oil producers should accept that the combustion engine and biodiesel have no future on the European market. Even the transport minister of Germany, Europe’s car manufacturer No. 1, in March 2021, announced plans to outlaw conventional motors by 2035.

Where to go from here? This article suggests a three-thronged approach to shape palm oil’s future in Europe: Policy – market – logistics. In the following sections, the three strategic angles are introduced and will be dealt with more in-depth in subsequent articles.

Policy Angle: Not so splendid isolation – does Europe need Asia more than ever?

The last few years have been anything but smooth sailing for the EU. The former grand vision of “ever closer union” seems but a faint memory now that Britain has left and Hungary and Poland continue to be more than a thorn in the EU’s side

Even alliances long thought to be cast in stone have begun to crack as the Trump presidency has left Transatlantic Relations reeling.

So while Brexit has further weakened the EU, China is flexing its muscle. With the Regional Comprehensive Economic Partnership (RCEP) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) the Middle Kingdom has solidified its position in the Asia-Pacific region. A fact that keeps European decision-makers awake at night.

Further adding to Europe’s woes, the new dawn in EU-Russian relations that set in 35 years ago with Gorbachev’s perestroika (“restructuring”) since the turn of the millennium has slowly but surely eroded into a somber dusk.

In short, Europe needs new friends. And it is looking towards the Asia-Pacific and especially to Southeast Asia.

Market Angle: Back to basics – can palm oil feed Europe, too?

On a global scale, feeding people is by far the dominating role of palm oil. In terms of volume, more than two-thirds of all palm oil produced is for food uses. And the lion’s share goes to cooking oil in South-Asia.

Figure 6: 2020 Share of different palm oil uses in total production (in million MT and %)

Source: UFOP, based on Oil World and USDA data

In Europe, the situation is different. There, as figures 5 and 6 above show, palm oil consumed as food has declined from around 4 mn tons in 2010 to 2.9 mn in 2020 and is projected to fall further (these figures include consumption for animal feed and cosmetics).

Given the biodiesel market’s imminent death and the low elasticity of the heating and electricity sector, it seems logical for the Malaysian palm oil industry to examine if there may be growth potential in food.

What if Malaysia decided to tackle cooking oil competitors sunflower and olive oil head-on? This approach could be embedded in a strategy that considers palm oil less a commodity and more a consumer good. It may even mean a Direct to Customer (DTC) approach, cutting out the middleman.

In Eastern Europe, where purchasing power is lower, price may be a competitive advantage. In the more demanding Western markets, sustainability and premium brand image may count.

In that context, there are at least two avenues to explore:

  • The expanding halal food industry in Europe: Roughly 16 million Muslims (about half the population of Malaysia) live across the continent: 5 mn in France, 4.5 mn in Germany, 3 mn in the UK, plus many Bosniaks in South-Eastern European countries like Bosnia, Albania, Serbia).  
  • The increasing trend for organic food: already red palm oil, often produced in Latin America, can be purchased in specialty shops. It sells for around USD 18 to 24 per liter.

Logistics Angle: Where East meets West – opportunities in Eastern Europe?

What implications will the Chinese “One Belt, One Road” project and the European Transport Corridor Europe-Caucasus-Asia” (TRACECA) and EU Strategy “Connecting Europe & Asia” have for palm oil trade from Asia?

China is focusing on the ports of Trieste (Italy) and Piraeus (Greece), but also the port of Constanta in Romania (incidentally, the city is also the Islamic center of Romania) is attracting ever more attention. It is already the largest port on the Black Sea and growing strongly. Through a system of channels and rivers, the connection between Constanta and Rotterdam is fully navigable.

It seems worth exploring whether Malaysia could establish a second European redistribution hub other than Rotterdam. Perhaps in Constanta. And in addition to liquid bulk storage, upstream processing on-site might be worth a look, too. Cost in Romania a considerably lower than in the Netherlands, for example.

The Bottom Line

Of course, as Yogi Berra said: “It’s tough to make predictions, especially about the future.” What exactly the next decade or so holds for palm oil in Europe is hard to say.

However, the writing is on the wall that changes are coming to an era marked by exporting large quantities of a homogenous commodity. Discerning European consumers are very conscious about the health and environmental aspects of what they buy. Industry is answering that call in marketing and purchasing behavior. Politicians continue to expand green legislation.

Faced with this, the Malaysian palm oil industry can only benefit from a “no holds barred” brainstorming of how to adapt to European realities.

Prepared by  Uthaya Kumar 

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