Vietnam and Indonesia supply 25% of the world’s coffee. (Source: HSBC graphic)This report, bearing the title “ASEAN Perspectives - the arrival of ElNiño", was unveiled last week.
Economists working for HSBC believe that the yield of pivotal agriculturalproducts in Vietnam, including rice and coffee, could suffer significantly inthe wake of the El Niño phenomenon.
The report underscores the primary peril posed to the agricultural sector,highlighting crops such as rice, palm oil, and coffee as particularlysusceptible. However, it also draws attention to potential risks faced by thesemiconductor industry.
Current severe heatwaves sweeping across ASEAN nations are suggestive of theresurgence of El Niño, a meteorological event usually correlated with droughtand water shortages. The harsh manifestation of El Niño in 2015-16 had adetrimental impact on the region's economy. In its aftermath, rice productionin countries such as Thailand and Vietnam dropped by more than 10%,exemplifying the potential threats posed by this phenomenon.
Whilst coffee might be considered a 'minor' commodity in comparison to others,its significance should not be underestimated, especially given the wide arrayof global consumers who perceive it as a daily essential. Despite the fact thatit constitutes less than 1% of total exports, on a par with palm oil, Vietnamand Indonesia nonetheless supply a quarter of the world's coffee.
The majority of this contribution is in the form of Robusta beans,characterised by their bitter taste and heightened acidity. It's worthrevisiting the 2015-16 period when coffee production in these economies slumpedby 10%, inciting speculation regarding the potential ramifications of El Niñothis time around.
More pointedly, forecasts from the USDA suggest a decline in Robusta productionin Indonesia by 20% in the 2023/24 cycle, as the dry season has made an earlierappearance, impacting over 60% of the coffee-producing region.
Moreover, ASEAN's global preeminence in the palm oil market is well documented.Indonesia and Malaysia collectively generate 85% of the global palm oil supply,trailed by Thailand at 4%. Notably, palm oil accounts for 10% of total exportsin each of these nations.
Whilst the El Niño phenomenon is still in its infancy, authorities in bothIndonesia and Malaysia have raised alerts about potential disturbances to palmoil yields. Indonesia has declared emergency measures in seven provinces,predominantly those engaged in palm oil production.
It is noteworthy that palm oil yield traditionally experiences a drop during anEl Niño year, and also contributes to air pollution as farmers resort toburning fields to make way for new crops. Concurrently, the Malaysian Palm OilBoard has cautioned that production could decrease by 1-3 million tonnes (6-17%)during this episode.
However, the impact is anticipated to be less drastic than during the 2015-16El Niño event, which saw a reduction of 20%, due to better farming practicesand enhanced labour conditions. Nonetheless, the full effect may not be evidentfor another 15-18 months, as per Malaysian officials, suggesting that this is arisk to monitor more closely in 2024 rather than 2023.
The HSBC reports indicate that the ripple effect of El Niño extends beyond theagricultural sector and could potentially cause disruptions to industrialproduction due to energy shortages. Both Vietnam and Malaysia offer pertinentexamples of such materialised risks. As of early June, a number of Vietnam'snorthern provinces, which host major electronics manufacturers such as Samsung andFoxconn, have grappled with electricity shortages. These power disruptions arecaused by a dearth of hydropower, a significant source of electricity in theregion, as the heat and droughts associated with El Niño have led to reservoirsdrying up, even causing major dams in the north to reach dead storage levels.
Fortunately, recent moderate rains have caused the water levels in allreservoirs across the nation to surpass the threshold required for safeelectricity generation, according to state utility Vietnam Electricity (EVN).Consequently, after several electronics manufacturers had to curtailproduction, power shortages have started to diminish recently, facilitatingfactories to extend their operating hours. However, economists at HSBC stressthat El Niño-related energy risks require closer observation, as they mayexacerbate Vietnam’s manufacturing vulnerabilities, especially during a periodwhen the country has been dealing with the escalating challenge of dwindlingexport orders.
Fortuitously, ASEAN policymakers demonstrate acute awareness of theimplications of El Niño, issuing early warnings and proactively adoptingmeasures to fortify against potential economic disruptions. Countries haveturned to tactics such as cloud seeding, augmenting specific agriculturalimports, and implementing partial manufacturing cutbacks to offset potentialdisruptions induced by El Niño, as indicated in the report./.
VNA
