Palm oil, which accounts for over 5% of Malaysian exports, has seen a dramatic decrease in stock levels with the figure for January at its lowest since June 2017. The low stock level has been largely attributed to poor weather conditions, lower fertiliser usage, as well as declining levels of production. The low levels of output have raised concerns over a potential supply-side shortage.
Contrary to the falling stock levels, Palm oil producers in Malaysia are actually more concerned with the declining levels of demand from their two largest customers: India and China. Following a diplomatic row between the two countries, exports to India decreased significantly whilst exports to China are decreasing in the light of the coronavirus epidemic currently crippling the world’s second largest economy. The combination of these two events are predicted to have caused a year-on-year reduction in palm oil exports of over 8.2% in January.
THINK LIKE AN ECONOMIST!
Q1. What is meant by the term supply-side shortage?
Q2. With the use of a diagram, show the effect of the decrease in stock levels on the market for palm oil.
Q3. Analyse the impact that the reduction in exports of palm oil is likely to have on the Malaysian current account for January.
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