MALAYSIA may currently be in a sweet spot as it enjoys high prices of commodities such as crude and palm oil, but for how long can these good prices last?
Recessionary risks, reduced imports from top buyers and the rise of electric cars are among factors that will likely dampen demand.
In the spotlight is Indonesia’s flip flop on its export ban on palm oil, and the possible impact on prices as well as demand for Malaysian palm oil.
Currently, the Malaysian government is benefitting from higher commodity prices as it is able to collect oil and gas-related revenue such as the petroleum income tax, export duty, petroleum royalty and dividend from its investment in Petroliam Nasional Bhd.
But we should not be complacent, as the windfall may not be sustainable.
For instance, the emergence of electric vehicles will change the consumption of fuel by internal combustion vehicles.
There must be a roadmap of how the government intends to reform the economy to make it more vibrant. It should also be an economy that is propelled by the private sector, where allocation of limited resources should be put into good use.
This pivoting has to be communicated effectively so that everyone knows the direction and are able to see the benefits for all, said Bank Islam Malaysia Bhd chief economist Dr Mohamed Afzanizam Mohamed Rashid.
Currently, high prices of commodities globally continue to benefit Malaysia, given its net exporter status of oil and commodities.
The supply of palm oil is inelastic with respect to prices in the short term, where shifts in prices do not drastically impact its overall supply.
This is given that supply chain components like imported labour continue to be constrained in Malaysia.
With environmental concerns still taking center stage in Indonesia, there will be no fresh sources of supply worldwide in the near term.
There are concerns that demand for palm oil from Indonesia, the world’s largest producer, is pushing large swathes of land to be converted into oil palm plantations.
We shall have to wait and see how strong a demand destruction there will be for commodities, when the next global slowdown or recession hits, said former Inter-Pacific Securities head of research Pong Teng Siew.
Indonesia’s recent decision to allow exports of palm oil again is not expected to have much impact on Malaysia.
The interruption of supplies has affected Indonesia’s standing as a reliable source of cooking oil, and it is uncertain if there will be a repeat episode, said Pong.
These episodes of export bans have again raised the risk of Indonesian planters, making the valuation premium of Malaysian planters justifiable, said Etiqa Insurance & Takaful Bhd chief strategy officer Chris Eng.
Nevertheless, palm oil prices should ease while Malaysian planters with acreage in Indonesia will benefit.
While Indonesia’s recent flip flop on the palm oil export ban should benefit Malaysia, the world’s second largest producer, commodity prices may not stay high all the time.
This is especially as end demand from traditional customers such as China and India starts to slow down markedly, said OCBC Bank (M) Bhd economist Wellian Wiranto.
Scorching prices are said to have slowed down imports of palm oil by top consumers – China and India.
While the original ban was viewed as a stop-gap measure by Indonesia to soften domestic cooking oil prices, normalisation of Indonesian palm oil supply may see a temporary supply surge.
But the longer term dynamics will depend on supply factors like crop yield and labour conditions.
Malaysia largely exports food and energy commodities which are likely to remain in high demand if the Russia-Ukraine war is prolonged, said Fortress Capital Asset Management Sdn Bhd CEO Thomas Yong.
The Russia-Ukraine war has threatened the supply chain as Malaysia’s exports were boosted by high prices and rising demand for commodities.
The durability of strong commodity prices also depends on the duration and depth of the geopolitical conflict and supply disruptions due to climate change.
Demand for commodities will be dampened if the global economy slows down sharply, especially in view of recession risks in the United States and European Union as well as disappointing growth in China, said Socio Economic Research Centre executive director Lee Heng Guie.
There are fears that China may miss its growth target by a large margin as a result of the country sticking to its zero-Covid policy.
Aggressive interest rate hikes in the US have raised the fear of recession, while chief executive officers of several blue chip companies have told CNBC that they see significant recession coming up in Europe.
Europe is caught in the fallout from the Russia-Ukraine war and the related sanctions as well as fears over energy supply.
Commodities go through a cycle of boom and bust; we should watch out for developments that bust the boom.
Yap Leng Kuen is former StarBiz editor. The views expressed here are the writer’s own.