Malaysia’s palm oil – what are its prospects ahead?

The palm oil industry remains a significant contributor to the Malaysian economy with over 4.9 million hectares of planted area (photo credit: PEMANDU).The palm oil industry remains a significant contributor to the Malaysian economy with over 4.9 million hectares of planted area (photo credit: PEMANDU).

By Kamil Ridzuan

Although Malaysia has fallen in ranking to become the world’s second largest producer of palm oil, the country continues to be the global benchmark when it comes to developments in the industry especially in determining the direction of crude palm oil (CPO) prices.

At its height, CPO prices consolidated over the RM4,000 a tonne in March 2008.

But prices have since almost halved, hovering at the RM2,300-RM2,500 level in 2012 and much of 2013. What are its prospects this year? Can it ever revisit the good old days?

Industry captains say a repeat of the RM4,000 a tonne price is a tall order but even at over RM2,000 a tonne, producers are making a good profit margin.

CPO prices are expected to remain strong throughout the year, supported by demand from traditional buyers such as China, Europe and India as palm oil, which is one of the world’s most efficient oils, is still sought as a food item and for palm oil-based biodiesel.

IOI Corp Bhd executive chairman Tan Sri Lee Shin Cheng does not expect prices to drop further. “We are now entering the low crop period and heavy rainfall has somewhat hampered harvesting activities in some areas. I believe the CPO prices can go up some more,” he said.

He is hopeful palm oil will trade as high as RM2,800 per tonne by the end of this quarter.

“Demand for palm oil is picking up again, especially from traditional markets. Palm oil is the most popular vegetable oil in the world. It is nutritious and affordable,” said Lee, who heads one of Malaysia’s top five plantation companies.

One of the world’s 17 edible oils and fats, palm oil is in for an exciting period boosted by sustained demand as it is arguably the world’s most efficient and most competitive oil pound for pound compared to its peers such as soybean oil and rapeseed oil.

Malaysian Palm Oil Association chief executive Datuk Dr Makhdzir Mardan said palm oil is the most popular cooking oil consumed around the world. Malaysia and Indonesia collectively ship out more than 35 million tonnes of palm oil to over 150 countries.

Oil World, an authoritative trade journal, said that, in 23 years, global palm oil consumption had expanded threefold. Rapeseed oil purchases, however, only increased by 2.5 times and soybean oil’s popularity just doubled.

CPO prices expected to improve throughout the year

RHB Research Institute is positive on CPO prices as Malaysia’s palm oil stockpile only rose marginally to 1.9 million tonnes in December last year, which is likely to be the seasonal peak. It sees inventory easing in the months ahead – providing a lift for prices.

In its research report to investors as reported in the Malay Mail, RHB Research said Malaysia’s palm oil inventory at end-2013 was sharply lower vis-à-vis end-2012 as export growth outstripped production growth and local consumption surged during the year.

It added that CPO prices are expected to improve throughout the year due to declining palm oil production in Indonesia as a result of rainfall deficit over the past two years.

“The weak first quarter production is likely to be seasonal and we believe that CPO prices will continue to strengthen in the second quarter as production weakness becomes more apparent.”

It has maintained its CPO price assumptions at RM2,700 a tonne for 2014 and RM2,900 a tonne for 2015, as well as its “overweight” recommendation on the plantation sector.

The positive news of Indonesia’s biodiesel supply agreement for three years with the country’s state-owned oil and gas firm PT Pertamina will be a positive catalyst for palm oil prices, it said.

“Although no details on the pricing mechanism and volume committed were provided, we believe this news reflects the Indonesian government’s earnestness in pushing through its biodiesel programme,” RHB Research said.

An important development in Malaysia this year is the unveiling and implementation of the Malaysia Sustainable Palm Oil standards.

This new standard will hopefully create awareness among global consumers that Malaysia’s palm oil is harvested sustainably and does not involve the destruction of orang utan habitat and deforestation, and could bolster palm oil exports to new markets such as the US and Pakistan.

However, the industry will be wrought with challenges throughout the year such as last week’s news that Sarawak could lose some RM400 million in annual sales tax revenue from oil palm products following a multinational refinery company’s refusal to buy CPO from mills in the state.

Singapore-based Wilmar International Ltd, controlled by Malaysia’s richest man Robert Kuok, and which has a refinery in Bintulu, has informed the state government it would stop buying CPO from plantations in forest areas and peat swamp land in the state from next year.

No reason was given but it is believed that Wilmar was pressured by non-governmental organisations in Europe to make such a restriction on the state’s oil palm products.

Notwithstanding that, the industry must march ahead as summed up by Plantation Industries and Commodities Minister Datuk Amar Douglas Uggah Embas who said industry players should forge partnerships and closer relations to handle areas of common interest so as to meet the insatiable and increasingly sophisticated consumer appetite.

Today’s oils and fats business is not just to enable supply to meet demand and market entities have to be ready to address new demands for high quality products that are healthy, environment-friendly and sustainable.

Malaysia is the world’s second largest palm oil producer after Indonesia. In 2012, it produced 18.78 million tonnes, or 34.95 per cent of total global palm oil production, and exported 17.57 million tonnes, or 43.1 per cent, of the world’s palm oil.

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