MALAYSIA’S palm oil industry cannot afford to lose the European Union market because the damage to the industry’s reputation could be irreparable and cause a cascading effect, analysts told The Edge Financial Daily.

Malaysia is the world’s second biggest palm oil producer after Indonesia, and the EU market was both countries’ second-largest palm oil export destination last year.

In 2018, Malaysia exported a total of 1.91 million tonnes of palm oil to the EU, according to data from the Malaysian Palm Oil Board.

The European Commission’s draft regulation recently concluded that palm oil cultivation causes excessive deforestation and that its use in biofuels should be reduced to zero by 2030.

The EU Parliament and member countries have two months to decide whether to accept or veto the regulation.

Should the EU decide to accept the ruling, Malaysia’s palm oil industry stands to suffer great losses in the long term.

“Malaysia cannot afford to lose the EU market, not because of the loss of earnings, but because the damage to reputation can be irreparable,” said Sathia Varqa, owner of Singapore-based Palm Oil Analytics.

Varqa said Malaysia and Indonesia may easily find replacements from the displacement to the EU, but it will be a lot more difficult for Malaysia to recover when it comes to the reputation of palm oil.

He told The Edge this will be especially true if the ban leads to policies in other countries or in other areas of palm oil use, transpiring from a domino effect of the bloc’s decision.

Analysts urged the government to be more aggressive in countering the EU stance, which is expected to reduce palm oil exports of Malaysia and Indonesia by about 6.5 million tonnes or 9% of the total palm oil production, according to Alliance DBS Research.

Prime Minister Dr Mahathir Mohamad has said the government may decide to ban certain imports from the EU countries as a retaliatory measure over the bloc’s discrimination against palm oil exports.

But analysts also said Putrajaya must act fast to come up with a proper contingency plan before it loses its grip on the EU market.

They say that Malaysia’s B10 biodiesel mandate for the transportation sector, and B7 for the industrial sector, are insufficient to fully offset the impact, should Malaysia lose the EU as its key market.

“The Malaysian government has to do all it could to counter this act. The B10 biodiesel mandate would be enough to cushion the impact of the decrease in palm oil imports from the EU in the short run, but not in the long run,” said AllianceDBS Research in an email reply to The Edge Financial Daily.

The research unit noted that Indonesia has put in place the mandatory use of a 20% biodiesel blend last September, and is already mulling further domestic biodiesel consumption to 30%, or even 100%, to help absorb more crude palm oil.

However, the Malaysian mandate at best could absorb an insignificant 3% of the country’s production, compared with the much more meaningful Indonesian B20 mandate, which is expected to consume about 13% of stockpile. – March 25, 2019.