In September 2019, British Premier Boris Johnson infamously said: “I’d rather be dead in a ditch than delay Brexit.” Mr. Johnson and the country he leads as of February 2021 have avoided those fateful events. But both have come perilously close.
Aside from Brexit, COVID-19, of which Britain is one of the worst affected European victims, continues to be the big mischief hanging over the UK. What are the implications of both issues for the palm oil trade?
Take COVID first. After an initial wave of the pandemic that ran roughly from January to June 2020, which was more severe than on most of the continent, in December 2020, a new mutation of the Coronavirus named B.1.1.7 was discovered in Britain. It proved to be much more contagious than the original virus. Consequently, Premier Johnson had to announce a third lockdown for the country on January 4th, 2021.
And Brexit? For years, the Brexit debate dominated the daily news in the UK. Now the separation is complete. England is no longer part of the European Union (EU). Officially, the country already left on January 31st, 2020. But there was a transition period that expired at the end of 2020.
Politicians, businesses, and the population were supposed to prepare for the exit. But things turned out differently. Only shortly before the deadline and with a no-deal-scenario looming, representatives of the EU and British Prime Minister Boris Johnson managed to agree on rules to organize the future relations between the island and the continent.
What is the UK – EU agreement?
After 4 ½ years of uncertainty and speculation, the free trade agreement negotiated between the EU and the UK entered into force provisionally on January 1st, 2021. It puts the relationship between the EU and the UK on a new footing.
The agreement establishes, among other things, a comprehensive economic partnership. Its core is a free trade agreement providing for neither tariffs nor quotas for virtually all products exchanged between the UK and the EU. Main caveat: A prerequisite for duty-free treatment is that the rules of origin are complied with.
Duty-free treatment applies only to products originating from the contracting parties. It is therefore only granted if goods originate in the EU or the UK. There are several qualifications as to what “originating in the EU” means.
Among them is a stipulation that considers goods originating outside the UK as eligible for free trade treatment if they have been sufficiently worked or processed. Only a certain proportion of input materials from third countries may be used. Product-specific rules of origin are to be observed.
Short to medium term effects on palm oil demand
The Current Palm Oil Scenario
As per the latest available Oil World figures, the UK in 2019 imported a total of 505.9 thousand metric tons (MT) of palm oil. That makes palm oil by far the leading vegetable oil import (Figure 1).
Figure 1: UK Vegetable Oil Imports 2019 (´000 MT)
The numbers above include intra-EU trade. The leading country of origin for palm oil imports in 2019 was the Netherlands, followed by Papua New Guinea (Figure 2). Import volume directly from producing countries (i.e., excluding intra-EU-trade) stood at 320 thousand MT.
Figure 2: UK Palm Oil Imports by Country of Origin (´000 MT)
The Malaysian Palm Oil Board (MPOB) recorded palm oil export volumes for the period January – December 2020 of 15.505 tons and a decrease of more than 32 % when comparing January 2020 and January 2021 (Figure 3).
Figure 3: UK Imports of Malaysian Palm Oil (MT)
One reasonable interpretation of the MPOB figures is that they show the double effect of Brexit and COVID on the British economy. The country’s GDP in 2020 shrank by a full 9.9 % – worse than in most European countries. Many observers point out that this was the poorest economic performance since 1709 when the “great frost” led to a failed harvest.
The Medium-Term Outlook
The UK economy will continue to be in dire straits in 2021, again for the same two reasons: COVID and Brexit. What could the impact be on palm oil?
Negative for palm oil will be the overall slump in demand as, in particular, hotels, restaurants, and tourism remain in lockdown. Also, the transport sector is affected.
Brexit is severely hampering trade with the UK’s most important partner, the EU. The British Road Haulage Association, in a letter to the responsible cabinet minister Michael Gove dated February 1st, 2021, sounded the alarm. The group reported a drop in UK exports to the EU of 68 % compared to the same period the previous year.
On the other hand, for the time being, many EU goods do not find their way across the Channel, leading to an increase in consumer prices, further lowering demand.
But there is also a possible upbeat scenario for palm oil that may grow out of Brexit.
First, the post-Brexit trade agreement contains provisions on rules of origin that conceivably might work in favor of palm oil. They aim at zero tariffs or quotas on goods traded between the UK and the EU – provided the rules of origin are met.
Those rules entered the agreement because the EU obviously wants to avoid circumvention in the sense that Britain imports something duty-free from third countries and then re-exports – also duty-free – to the EU.
However, it seems that there might be certain exemptions for palm oil. In guidance published by the UK Government under Section 4.2.6, the following text appears. It appears to imply that products like chocolate bars containing palm oil can continue to be exported to the EU free of duty.
A second segment that might be favorable for palm oil concerns biofuels. Now that the UK is no longer in the EU, the rules of the RED II (phasing out palm oil in biofuels by 2030) of course no longer apply. The emerging scenario is still foggy, and many issues of how the UK and the EU will design that part of its relationship have been delegated to expert groups.
But still, the chances are that the UK is keen on getting on the right side of palm oil-producing nations in Asia as it wants to strike post-Brexit trade deals in line with its “Global Britain” initiative. Bloomberg already in 2019 opined:
“Post-Brexit, the U.K. will have a historic opportunity to strike a trade deal with one of the world’s fastest-growing regions and prove that it can shed European red tape and protectionism. The key is to rethink the European Union’s policy on palm oil.”
This assessment points to a longer-term trend that might work in favour of palm oil.
Will “Global Britain” shine a warm light on palm oil?
“Global Britain” is the UK government’s mantra for redefining the country’s role in a post-Brexit world. Large portions of the concept still have to be filled with substance, but a charm offensive regarding Asia is already underway – and palm oil is a central issue there.
On February 1st, 2021, Great Britain formally applied to join the CPTPP, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, of which Malaysia is a founding member. The UK is the first non-founding country to apply for membership. And the British government is wary of the fact that palm oil is a sticking point in the negotiations.
Jon Lambe, U.K. ambassador to the Association of Southeast Asian Nations, is quoted as saying:
“From my perspective, this is an area where it is important we work together. There is a strong consumer demand in the U.K. for palm oil and palm oil products. There is a strong industry in Malaysia and Indonesia and it is vital that we work together to ensure that both ends of that supply chain are content.”
In conclusion: it is possible that Brexit will usher in a new dawn for palm oil in Britain, if not Europe, through the British back door. But due to COVID, it will be some time before the UK economy will pick up steam again.
Prepared by Uthaya Kumar
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