COVID-19 lockdowns in Asia deepen commodity supply-chain pain

The recent surge in COVID-19 cases in Southeast Asia has throttled ports and locked down plantations and processors, sparking extended disruptions of raw materials such as palm oil, coffee and tin.

Restrictions in Malaysia, the world’s second-largest producer of palm oil, have prevented migrant laborers from traveling to plantations, raising prices of the ubiquitous edible oil used to make candy bars, shampoo and biofuel.

Lockdowns in Vietnam, the world’s No. 2 coffee exporter by volume, have delayed the processing and export of coffee beans, adding to production concerns caused by poor weather in Brazil. The global tin supply has been hit by Covid-19-related interruptions at a smelter in Malaysia, contributing to higher prices for the industrial metal, which is used to connect computer chips to circuit boards in electronics.

Prices for each of these commodities have risen to multiyear highs in recent months, adding costs that are being passed on to consumers.

"These supply shocks reverberate globally because Vietnam and Malaysia hold large market share of key commodities," said Trinh Nguyen, a senior economist at Natixis.

Businesses including Unilever PLC, the consumer-goods company, and J.M. Smucker Co. , which includes Folgers coffee, have said increasing prices of raw materials are contributing to cost pressures.

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"The price of palm oil, a key ingredient for our skin cleansing products, is now 70% higher than its long-term average, with increased demand and lower harvest yields driving up the price," Graeme Pitkethly, Unilever’s chief financial officer, said in July. He added that the company had already raised prices for some products.

One reason for the elevated price of palm oil is a surge in Covid-19 cases in Malaysia. The Southeast Asian country has recently been recording around 19,000 new cases and 400 deaths a day in its worst outbreak since the pandemic began. Travel restrictions in place since March last year have made it difficult for workers to reach plantations, leading to a steadily declining number of laborers. The palm-oil sector relies on migrants from Indonesia, which is the world’s largest producer of the commodity, as well as Bangladesh and India.

Rigid internal-movement curbs put in place in recent months in response to rising cases have added to the challenges facing palm-oil companies, as have outbreaks on plantations, causing shutdowns.

Sime Darby Plantation Bhd. said its labor shortfall in Malaysia has worsened to about a fifth of its total needs, meaning around 6,000 unwanted vacancies compared with 2,000 in March 2020. The company said it produced about 6% of Malaysia’s crude palm oil last year. The labor shortfall and lower rainfall contributed to a 5% drop in its production of palm oil in Malaysia in the first half of the year, the company said.

The company said it has invested in new mechanization and automation to reduce its reliance on manual labor.

FGV Holdings Bhd., which said it produces around 15% of the country’s crude palm oil, said it has faced challenges in producing expected volumes because of the recent surge in Covid-19 cases in Malaysia. The company said infections on company estates and milling operations led to mandatory lockdowns.

The overall effect has been a 13.6% decline in Malaysia’s palm-oil exports over the first eight months of 2021 compared with the same period last year, according to data from the Malaysian Palm Oil Council, an industry group.

"You don’t have enough workers going around to harvest the fruits," said Ivy Ng, regional head of agribusiness research at CGS-CIMB Securities in Malaysia.

As the government plans to reopen the economy late this year, Ms. Ng predicts regulations on foreign workers will be relaxed by early next year, which would help palm-oil plantations boost their labor forces.

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Covid-19 travel restrictions in Asia are also hitting coffee. Beginning in July, an outbreak in Vietnam prompted the government to introduce curbs on movement that have interfered with shipments. Vietnam is the world’s largest exporter of the bitter-tasting robusta beans used in instant coffee and espresso blends.

"Vietnamese exporters are having difficulty transporting goods, including robusta green coffee and King Coffee products, to the ports for shipping around the world," said Le Hoang Diep Thao, chief executive of TNI King Coffee and vice president of the Vietnam Coffee and Cocoa Association.

Vietnam’s coffee exports from January through Aug. 15 fell 8.2% from the same period last year. "Local and foreign traders are extremely worried," Ms. Le said, adding that the coffee association was lobbying Vietnam’s government to loosen restrictions to avoid delivery delays.

Large coffee companies often use both robusta and its aromatic cousin, arabica, in their mixes and brews. Prices of both types have risen sharply this year, mainly driven by drought and frost in Brazil, the world’s largest coffee exporter. Vietnam’s production troubles over the past several months are contributing to higher prices.

Western coffee companies said higher prices will filter down to consumers. "Coffee costs have gone up," Smucker Chief Financial Officer Tucker Marshall said on an August earnings call, adding, "We will take additional pricing actions and measures to ensure that we recover the inflationary impact."

Michael Orr, spokesman at JDE Peet’s JDEP -1.16% NV, said the Dutch coffee company has over the past year "seen a sharp rise in ingredient, freight and other costs, which will require us to take appropriate measures. Historically, significant fluctuations in green coffee prices have been reflected in the market and we expect that precedent to continue."

Tin prices rose in recent months after Malaysia Smelting Corp. Bhd., one of the world’s largest producers of refined tin, reduced smelter staff and halted operations for stretches over the past several months to comply with government regulations to limit the spread of Covid-19.

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Malaysia’s tin exports decreased 29% in June from a year earlier. A representative for the company said tin production had yet to return to normal, but added that it expected to restore operations to pre-pandemic levels gradually as Malaysia’s government reopens the economy.

"Tin prices continue to trend upwards, lifted by continued demand for tin solder in consumer electronics, and supply disruptions due to lockdowns in tin-producing countries around the world," the company said in a financial report last month.

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