OVERVIEW

THE   MALAYSIAN   OIL  PALM INDUSTRY

IN 2004              - Dr. Leong Tat Thim

Introduction

The demand for vegetable oils will expand dramatically with continued growth in world population. To meet this demand, the oil palm industry has to increase land area for oil palm cultivation as well as increase yield on per hectare basis.

The main challenges facing the oil palm industry are to keep on maintaining low production cost and at the same time striving to increase yield from existing plantations. The pressure from the combination of higher costs and stagnating yield are harsh realities which our planters are facing today. There is no compromise as our country and the livelihood of several hundred thousands of people are dependent on this golden crop.

The scientists must produce superior oil palm planting materials. The planters must mechanize and improve their agricultural practices. The labour force must be disciplined and the management must also be efficient. All these are needed to make our industry remain resilient and able to withstand low commodity prices, if it comes in the future.

Crude Palm Oil (CPO) Prices

The Malaysian Oil Palm Industry witnessed another sustainable year as Crude Palm Oil (CPO) price continued to extend its bullish trend from Year 2003 into Year 2004 (Figure 1). From January 2004 to May 2004, CPO price hovered between RM1,791.00/tonne and RM1,885.00/tonne and peak at about RM2,000/tonne in March 2004. However, the bullish trend was not able to sustain into the second half of Year 2004. It slid to a low of RM1,476.00/tonne in July 2004 and mildly rebounded to RM1,551.00/tonne in September 2004.

In fact, the price of CPO has dropped more than 20% since May ’04. Fortunately, the CPO prices maintained at about RM1,400.00/tonne to RM1,500.00/tonne over the remainder of the year for the price to average at RM1,600.00/tonne.

The strengthening of prices during the early period of 2004 were attributed to the spill over of robust demand and continued tightness in global oil and fats supplies (MPOB-2003). However, CPO prices took a downward correction towards the end of 2004, being pressured by dampening factors like higher soyoil production in the United States and an increase in global vegetable oil stock level. Another contributing factor is the negative effect resulting from the falling demand in Malaysia’s two biggest markets (i.e. China and India). India’s decision to lower import duty for soybean would make it cheaper to produce soybean oil. China’s demand for CPO was affected by government measures to cool its economy.

Fresh Fruit Bunches (FFB) Selling Prices  

The 2004 Peninsular average CPO price registered an average of RM1600/tonne which was about 3.6% higher than the Year 2003 average price of RM1,544/tonne. Hence, our estate owners and smallholders in Peninsular Malaysia were likely to have achieved a marginally higher earning in Year 2004, as compared to Year 2003 based on the selling price of FFB at RM323.84/tonne and RM291.98/tonne, respectively (Table 1).

However, the FFB selling prices in Sabah were RM284.03/tonne in Year 2004 and RM253.21/tonne in Year 2003. This implies that the estate owners and smallholders in Sabah got about RM45/tonne FFB lower than those in Peninsular Malaysia (Table 1). This is the result of additional freight charges of RM40/tonne for CPO and RM45/tonne for Palm Kernel being imposed on the estate owners and smallholders by the oil refineries in Sabah.

Increase in Sales Tax in Sabah

The dampening effect of the recent announcement by the Sabah Government to increase sales tax on CPO in the Year 2005 by raising the current 5 percent to 7.5% percent will have far reaching implication on the earnings of estate owners and smallholders in particular and the entire palm oil industry of Sabah in general. The additional cost resulting from the increase in State Cess will have to be absorbed into the already escalating production cost. Coupled with additional freight charges of RM40.00 a tonne for CPO and RM45.00 a tonne for PK, the additional cost resulting from increase in sales tax will further erode the earning of estate owners and smallholders in Sabah. Based on Year 2004 average CPO price, the impact of an additional upward revision of State Cess by 2.5% would have further reduced the smallholders’ selling price of FFB by 2.7% or RM6.96 a tonne.

Performance of the Malaysian Palm Oil Industry

With regard to production and export of CPO etc, MPOB reported that in Year 2004, the Malaysian production of Crude Palm Oil (CPO) increased by 4.64% or 0.62 million tonnes to 13.97 million tonnes from 13.35 million tonnes in 2003 (Table 2). However, the production of Palm Kernel Oil (PKO) was marginally lower by 0.06% to 1.643 million tonne from 1.644 million from the previous year.

The increase of CPO production is likely attributed to better OER (Jan-Oct 2004) at 20.01, as compared to 19.74% last year. However, during the same period, yield contracted from 15.91 tonne/ha to 15.19 tonne/ha (Jan-Oct 2004 MPOB).

Export of palm oil increased by 2.49% to 12.55 million tonnes from 12.25 million in 2003. However, export on palm kernel oil was lower by 10.73% to 0.78 million tonnes from 0.87 million tonnes in 2003.

Outlook for Year 2005 …

Many analysts and plantation chief executive officers have predicted another positive year for the oil palm industry. They expect the CPO prices to be maintained at around RM1,300 to RM1,500 per tonne and average at RM1,450 a tonne in Year 2005.

The main reason is that the Asian rust outbreak in soybean plantations will increase production costs and adversely affect soybean yield, both of which auger well for CPO prices in this calendar year. Another reason given is that the palm oil exports in China and the European Union increasing by 8.5% and 11.4% respectively. The firm exports to the European Union are believed to be linked to the stand against genetically modified organisms, prevalent in soybeans.

However, having said that, I wish to conclude by appealing to all planters not to be complacent. Both the management and employees must be cost conscious and productive to face the pressure of impending cost increases arising from fertilizer and employment of foreign workers.

----o----