Overview of The Malaysian Oil Palm Industry
In Year 2010
by
Dr. Leong Tat Thim
Introduction
Year 2010 was indeed a very challenging one for the oil palm industry. Production of FFB was adversely affected by El-Nino and La-Nina as well as by labour shortage. The country experienced severe drought (El-Nino) in the early part of the year followed by prolonged heavy rain and floods in the later part. Many plantations in Peninsular Malaysian encountered non-stop rain resulting in no harvesting of FFB for several days. Many oil palm estates in Johore were submerged by flood water which also cut off roads leading to several refineries in the key export port of Pasir Gudang in Johore. Malaysian refineries could not get sufficient crude oil to process and had to snap up more Indonesia crude palm oil to meet orders from China and India (StarBiz,2/2/11).
Besides the adverse weather situation, the oil palm industry also faced labour shortage as a result of the stringent and inconsistent recruitment policy on foreign workers. Plantation companies had to go through 2 ministries in as many months before getting their needed quota. Furthermore, it is becoming more difficult to get Indonesian workers because large oil palm plantations opening up in Kalimantan are offering competitive pay. As a result of labour shortage, oil palm estates, especially in Sabah and Sarawak, experienced losses of 10% - 15% FFB that could not be harvested and were left to rot (StarBiz, 6/10/10).
The Home Ministry has even proposed to disallow Indonesia workers from bringing over their wives and children. Even those workers currently staying with their families (allowed under previous policies) may also have to send them home (NST,19/8/10). Imagine the adverse impact it will have on crop production in estates in Sabah if such a recommendation is implemented.
On a brighter side, the CPO prices in Year 2010 were very encouraging due mainly to adverse weather conditions and the effects of a recovering global economy. During the first half of Year 2010(i.e. Jan’10 to Jun’10), CPO prices hovered above RM 2,500/tonne. Then in the second half of year 2010 (i.e. Jul’10 to Dec’10) CPO prices surged from RM 2,454.50 (Jul’10) to RM 3,625.50 (Dec’10) resulting in a average CPO price of RM 2,744.75 which was 22.3% more than that in Year 2009 but 4% less than the price in Year 2008 ( Fig. 1).
Crude Palm Oil (CPO) and Crude Oil Prices (Petroleum) in Year 2010
CPO prices remained above RM 2,500/tonne during the first 6 months (i.e. Jan’10 to Jun’10) of Year 2010 (Fig.1). During the 1st month (i.e. Jul’10) of the second half of Year 2010, the CPO price dropped slightly to RM 2,454.50/tonnes and thereafter soared to exceed RM 3,000/tonne in Nov’10 and RM 3,625.50/tonne in Dec’10, resulting in a average CPO price of RM 2,744.75/tonne for Year2010.
Comparing the average CPO price of RM 2,744.75/tonne in Year 2010 with those of Years2007,2008 and 2009,it was 4.0% lower than the RM 2,856.04 CPO price in Year 2008 but 11.5% and 22.3% higher than the RM 2,460.75 CPO price in Year 2007 and the RM 2,243.92 CPO price in Year 2009, respectively.
Although the average CPO price of RM 2,744.75/tonne in Year 2010 was 4.0% lower than the RM 2,856.04/tonne CPO price in Year 2008, the CPO price trend in Year 2010 was much more steady than that of Year 2008, when the CPO price dropped drastically from RM 3,454.50/tonne in July’08 to RM 1,562/tonne in Dec’08, causing considerable alarm in the oil palm industry.
A very close correlation between crude oil prices (petroleum) and CPO prices was observed for Years 2006 to 2010. However, in December 2008, the “decoupling” of CPO prices and crude oil price (petroleum) occurred when the crude oil price (petroleum) dropped below USD 45 per barrel (Fig.2C).
Heavy Taxes and Levies Faced by the Oil Palm Industry
While vegetable oil producers in Europe and the United States receive subsidies from their respective governments, quite the opposite occurs in Malaysia where palm oil is heavily taxed. Here the oil palm industry is subjected to numerous taxes and levies comprising MPOB cess of RM 11/tonne CPO, MPOB price stabilization cess of RM 2/ tonne CPO, windfall tax, state government tax (7.5% in Sabah and 5.0% in Sarawak),PK tax (5% in Sarawak) freight charges levied by the refineries (RM 40/tonne CPO and RM 65/tonne PK in Sabah & Sarawak), all of which constitute about 25.6% of the total tax paid by plantation companies in Malaysia while the corporate income tax makes up the rest at about 74.4% (Table 1).
As a result of State sales taxes, levies and freight charges incurred by plantation companies in Sabah and Sarawak, these companies have to pay higher taxes estimated at 37% and 35%,respectively while those in Peninsular Malaysia only pay about 26% tax, indirectly resulting in higher production cost of plantation companies in East Malaysia (Table 1).For example, plantations in Sabah have to achieve higher FFB production and higher OER than those in Peninsular Malaysia in order to even out the higher production cost incurred (Table 2).
It must be noted that while the 25% corporate tax is based on profit, the other taxes, cesses and levies are based on production of palm products which has no relationship to the actual profit of a plantation company. Hence, the windfall tax which is levied on FFB production is unrealistic and will further aggravate the higher production costs incurred in Sabah and Sarawak.
The windfall tax of 7.5% came into effect in Sabah and Sarawak from Nov’10 as a result of CPO prices exceeding RM 3,000/tonne. The burden of the windfall tax on plantations in Sabah and Sarawak is heavier than on plantations in Peninsular Malaysia because many of them are young plantations which have not yet achieved optimum yield.
As the windfall tax has been viewed as being very unfair and unrealistic, the Malaysian Estates Owner’s Association (MEOA) together with Sarawak Oil Palm Plantation Owners’ Association (SOPPOA) and Malaysian Palm Oil Association (MPOA) will make a joint appeal to Prime Minister Datuk Seri Najib Tun Razak to abolish the windfall tax (StarBiz, 1/1/11). Details of the proposals, comprising two phases, were submitted jointly to the Prime Minister by early March 2011 (Table 4).
Performance of the Malaysian Palm Oil Industry in Year 2010
Crude Palm Oil (CPO) production in Year 2010 decreased marginally to 16.99 million tonnes from 17.56 million tonnes achieved in Year 2009, a decrease of 0.57 million tonnes (i.e. 0.032%). Palm Kernel Oil (PKO) production was also lower in Year 2010 at 2.02 million tonnes compared to 2.10 million tonnes in Year 2009 - a marginal decrease of 0.08 million tonnes (i.e. 0.039%).
The lower CPO and PKO production in Year 2010 was mainly due to extreme dry weather conditions experienced in the early part of Year 2010 as well as to the prolonged heavy rainfall and flooding occurring in some key oil palm areas in Peninsular Malaysia at the end of Year 2010. in Dec’10, Malaysia’s palm oil production fell by 15.5% to 1.23 million tonnes (on a month-on-month basis) (StarBiz, 1/1/11). This decrease was reflected in the country’s closing palm oil stock which stood at 1.62 million tonnes in December 2010, down 27.7%, compared to the closing stock of 2.24 million tonnes in Dec’2009 (Table 3).
Palm Oil Exports in Year 2010 however, increased to 16.65 million tonnes from 15.87 million tonnes in Year 2009 - an increase of 0.78 million tonnes (i.e. 0.05%).
As a result of low production and the low closing palm oil stock in Year 2010, CPO Prices surged higher to RM 3,625/tonnes in Dec’10 and RM 3,772/tonne in Jan’11.
The CPO price is expected to remain strong in Feb’11.
Outlook and Challenges for Year 2011
The market outlook will continue to be bright for CPO price in Year 2011 because CPO is a very healthy oil which is comparatively cheap and continues to have strong demand from China, India and Shortage in the supply of palm oil is expected to persist due to increasing world population and lack of agricultural land. The higher cost of crude oil leading to higher production cost of other vegetable oils will indirectly push up CPO prices. It is predicted that the high CPO prices in Dec’10 will stay strong until the first quarter of Year 2011 mainly due to expected low yield in Jan’11 and Feb’11 as well as the current low inventory.
Industry Consultant, Mr. M.R. Chandran expects the CPO price for Year 2011 to average at RM 3,300 per tonne (StarBiz, 18/2/11). Mean while, a palm oil technical analyst said that within the next two years, CPO future prices could be traded between RM3,600 and RM 3,800 per tonne (StarBiz, 26/1/11). This prediction is supported by Oil World which, in its latest forecast, expects world palm oil production to increase only marginally by 3.4 million tonnes from 3.2 million tonnes. This production is not likely to meet the surging demand from China, India and other developing economies for food and non-food items, there by keeping palm oil prices high (Mielke, StarBiz, 10/2/11).
While CPO prices are predicted to remain good for Year 2011, there are still many challenges ahead. The first challenge to the oil palm industry is for CPO prices in Year 2011 to remain at a reasonably profitable level. It should not be artificially inflated to absurd levels through excessive speculation, export restriction and hoarding as this can have severe negative impact on poor developing countries.
The on-going challenge faced by the oil palm industry is labour shortage, resulting in poor field condition, delay in manuring operation and prolonged harvesting interval of fruit bunches. To overcome the acute shortage of plantation workers in Sabah, the State Government, on 12th January 2011 has, in addition to the existing source countries of Indonesia and Philippines, approved 5 years + 5 years work permit for the recruitment of foreign labour from Bangladesh, Nepal, Myanmar and Vietnam. This was in response to the many requests from plantation owners to allow them to hire workers from countries other than Indonesia, as Indonesian workers are no longer interested to come here since huge oil palm plantations are being opened in Kalimantan.
Another positive response was the implementation of the “FAST TRACK Recruitment System for Foreign Workers” for the period 24th Jan’11 to 22nd Apr’11 (i.e. 3 months) as an interim measure to alleviate the immediate shortage of workers in the plantation sector. This FAST TRACK system will enable plantations to get their quotas within 1 month instead of about 3 months, as is the case currently.
Another pressing challenge is the on-going environmental issue by non-government organizations (NGO) which are mainly funded by governments, trade unions and industries pursuing their own agendas. The Malaysian Oil Palm Industry must continue to rebut the “Anti Palm Oil Campaign”. It is gratifying to note that the Malaysian Palm Oil Council (MPOC) has done pretty well by aggressively promoting palm oil (i.e. calorie-rich and transfat-free, with neutral effect on blood cholesterol levels; identical to olive oil and rich in carotenoids and Vitamin E). Meanwhile, the Malaysian Palm Oil Wildlife Conservation Fund was also initiated to ensure that the orang utan and other protected animal species are further taken care of through the establishment of a mega wildlife sanctuary.
The oil palm industry must continue to make the world more aware of the role that oil palm has played in helping to raise income levels and eradicate poverty among the rural poor in Indonesia and Malaysia. Malaysian plantation companies must continue to produce palm oil in a sustainable way by getting RSPO certification. This will be a testimony to the world that Malaysia is committed to striking a balance between economic development and environmental conservation.
Acknowledgement
The author wishes to thank Ms. Susan Lai, Mr. Siew Kwook Keong and Ms. Fong Chooi Mui in the preparation of this paper.
Overview of The Malaysian Rubber Industry
for 2010
by
Dr. Chee Kheng Hoy
2010 was a fantastic year for natural rubber. Overall, demand jumped due to steady world economic recovery as well as improved sales in the automotive industry - especially in China and India. Export of the new grade of rubber China know as China Compound Rubber has exceeded SMR 20 in recent years because of its duty free status. The firm future market gave further support and the price of SMR 20 hit an historic high of RM 14.89 on 27 December and RM 9.83 on 28 December for bulk latex in bulk. The China National Bureau of statistics reported tyre output increased 10% in November from a year earlier to 67.44 million units. The total output in the January- November period jumped 215 to 708.86 million units. Also, the ANRPC reported rubber production was up 6.4% in the largest producer, Thailand during January-October, but is expected to fall 29.7% in November and December, leading to overall decline of 1.4% for the year.
The current world’s production of natural rubber is about 9 million tonnes and over 90% of it is produced from our region, mainly in Thailand, Indonesia and Malaysia. Currently in Malaysia, rubber smallholders and plantations (especially KLK and RISDA) are enjoying economic boom due to the high price of rubber. This has resulted in the revival of the industry which was once considered as sunset to the Malaysian economy. The Malaysian rubber industry will continue to play a major role in the national economy. It is intimated that by 2020, the revenue generated by the rubber industry will reach more than RM 50 billion; the rubber product sector alone will generate RM 26 billion as targeted in the Third Industry Master Plan (IMP3).
In the year under review, the Malaysian Rubber Board has a new Chairman, Datuk Wira Hj Ahmad Bin Hj Hamzah (with a luminous plantation career) and a Director General, Dr Salmiah Ahmad (previously Deputy Director General of then PORIM). Structural changes were under taken to put MRB and the industry on a stronger footing for the future. The Malaysian Rubber Board Scientific and Economic Advisory Council was formed, MEOA nomination to MRB Dr Chee Kheng Hoy ,who served as Chairman of the upstream committee. MRB will continue its effort in R&D activities to enhance tree and land productivity.
To improve rubber production, the Government plans to increase rubber replanting to 40,000 ha a year. The new development will mostly occur in Sabah and Sarawak where agriculture land can still be found. Arising from new rubber development or to rejuvenate the existing rubber plantings, the following issues need to be addressed: labour shortage, old low-yielding smallholdings, uneconomic holding size and low productivity. The Malaysian Rubber Board (MRB) has outlined its policy thrust in three main areas:-
- Increasing natural rubber productivity through new clones, improving exploitation techniques and reducing labour input;
- Enhancing production efficiency through consolidation of smallholdings; and
- Improving technology transfer through better inter-agency cooperation.
The Government decided to redevelop the LGM Experimental Station in Sungei Buloh under the Greater Kuala Lumpur Strategic Development Project. The project is to be undertaken as a joint venture between the Federal Government and the Employment Provident Fund. MRB (under the Ministry of Primary industries and Commodities) has owned the 3,348 ha (3,330 acres) tract since 1925. the development agreement is that LGM will retain 243ha (600 acres) for its germplasm collection, Hevea Academy and research and development amenities. As a partial replacement of the Sungei Buloh research station, a new research station will be located in Padang Terap, Kedah, a major rubber planting district in Malaysia.
Concurrent with exceptionally high rubber prices, there have been rampant theft of rubber in smallholdings and hijacking of vehicles transporting SMR and latex tankers. This is another side of the national security problem known only to and suffered by rubber growers. The MRB in its Enforcement Circular 2/2010 warns that buyer or seller licensees are not allowed to receive rubber suspected to have been stolen. Can more be done other than warnings and a few cases under police investigations?
Unknown to the general public and inventors who consider the rubber a sunset industry, the future of the natural rubber industry is, on the contrary, expected to remain bright. In the year under review, in terms of consumption, Malaysia is the world’s largest consumer of latex concentrate, the fifth largest consumer of natural and synthetic rubbers combined. As a supplier / exporter, Malaysia is the largest supplier of latex thread and cord, the world’s third largest producer of natural rubber and the third largest producer of natural rubber.