Malaysia: a year of two halves for palm oil sector

Labour shortage is the biggest hurdle faced by the palm oil industry this year, with losses for the country running into billions of ringgit, but the global economic reopening has resulted in pent-up demand for the versatile oil.

Palm oil and rubber are the two biggest contributors to the nation’s coffers under the agriculture sector, which ranked second in terms of trade, surpassing mining products, in 2020.

India consumed 40% more palm oil for the period between January and October 2021, notching up 2.8 million tonnes from 1.97 million tonnes for the same period last year.

While the labour crunch affected production, it nevertheless helped push up crude palm oil (CPO) prices by 65.6%, from RM1,728.50 to RM4,363.00 per tonne in January-November 2021 versus RM2,634.50 per tonne a year ago.

Plantation companies such as Sime Darby PlaNurul Hanis Izmirntation Bhd (SDP) also saw its net profit triple to RM610 million in the third quarter ended Sept 30, 2021, from RM190 million a year ago, while revenue surged to RM5.06 billion from RM3.18 billion previously.

The Malaysian Palm Oil Board (MPOB) revealed on Dec 10, 2021 that CPO production for the January-November period declined by 1.14 million tonnes, or 6.4%, to 16.67 million tonnes compared with 17.81 million tonnes during the January-November 2020 period due to the decline in fresh fruit bunch (FFB) processed by the mills arising from the lower FFB production.

Palm oil stocks at end-November 2021 were 16.3% higher at 1.56 million tonnes compared with a year ago due to lower palm oil exports and higher palm oil imports.

During the January-November 2020 reference period, the export of palm oil and other palm-based products declined by 8.8% to 22.14 million tonnes versus 24.27 million tonnes, as a result of low CPO production which limited export capacity.

“Despite the lower export volume, the higher prices of palm oil and other palm-based products have influenced total export revenue of these commodities in January-November 2021 to surge by 39.9% to RM91.37 billion from RM65.29 billion earned in January-November 2020,” MPOB said.

Palm oil export revenue totalled RM61.26 billion for January-November 2021 versus RM43.61 billion in the same period last year, which translated into a jump of 40.5%. Major export markets included India, China, the European Union, and Turkey.

During the 11th month of 2021, CPO price reached a high of RM5,341.00 per tonne against RM3,748.50 per tonne in January.

Labour shortage was the main obstacle for the industry, especially when locals are not keen to work in this so-called 3D job — dirty, difficult, and dangerous.

The labour crunch resulted in a 56% loss in FFB production, and more than 100% compared with 2020 and 2019. The loss, in value terms, was estimated at RM9 billion and RM6 billion, respectively.

To overcome this, the government has agreed to add about 32,000 foreign workers to the plantation sector, provided that they are fully vaccinated for Covid-19.

Forced labour issue by the United States on two Malaysian companies — SDP and FGV Holdings Bhd — and the EU’s never-ending anti-palm oil campaign were other hurdles faced by the industry.

Slapped with the ban by the US Customs and Border Protection (CBP), both SDP and FGV have been taking steps to overcome the situation.

To recap, on Dec 30, 2020, the CBP issued a Withhold Release Order (WRO) against SDP’s production process, based on information indicating that it had gone against all 11 of the International Labour Organization’s (ILO) forced labour indicators.

The issuance of the WRO against SDP came on the heels of FGV (Sept 30, 2020), which also involved labour practices. Both the companies have committed to taking all the necessary steps in order to get the WRO lifted.

In March, SDP established an Expert Stakeholder Human Rights Assessment Commission and appointed Impactt Ltd as a third-party assessor to conduct a comprehensive evaluation of the group’s labour practices across its Malaysian operations.

Meanwhile, in November, FGV appointed independent auditing firm Elevate to assess the group’s operations against the 11 ILO Indicators of Forced Labour, as advised by the CBP.

At the same time, both companies have invested heavily to salvage their image worldwide by upgrading workers’ facilities.

The Malaysian government has also initiated legal action against the EU members following their anti-palm oil measures.

The Ministry of Plantation Industries and Commodities (MPIC), with the cooperation of the Attorney General’s Chambers and the International Trade and Industry Ministry, filed a request for consultation under the World Trade Organization’s Dispute Settlement Mechanism.

Malaysia is not alone in this fight. It has joined hands with Indonesia, the world’s largest palm oil producer, to counter the international discrimination against the edible oil. Together, they account for 85% of global palm oil production.

Plantation Industries and Commodities Minister Datuk Zuraida Kamaruddin said that she had engaged with a think tank to prepare her case and would attend a dispute proceeding against the EU’s alleged discrimination in early January 2022.

In her recent interview with the Malaysian Palm Labour Facts, hosted by the Malaysian Palm Oil Council, Zuraida said she was seeking to build a relationship based on trust and fair trade rather than geopolitical tensions.

“We will also utilise avenues to exchange unambiguous information with the EU on the sustainability of our palm oil industry. These include the ASEAN EU Joint Working Group on Palm Oil and other collaborative projects.”

For Budget 2022, the government announced an allocation of RM20 million for the industry to counter international anti-palm activities.

Stockbrokers have mixed recommendations on the sector for 2022, due in part to their house views on the sector’s performance and demand/supply factors.

MIDF Research is “positive” about the sector, with a target price of RM3,000 per tonne for CPO. It also expects stockpiles to slightly improve to the pre-pandemic level. But it is concerned that the vegetable oil may be facing lower demand from key importers due to the lower price of soybean oil and higher production cost.

CGS-CIMB Securities Sdn Bhd is maintaining its “neutral” recommendation with CPO prices forecast at RM4,270, RM3,600, and RM3,240 per tonne for 2021, 2022, and 2023, respectively.

CPO prices could likely remain high, at least for the first three months of 2022, before trending lower when palm oil supply recovers and crushing activities of oilseeds improve, the stockbroking house said.

CGS-CIMB’s top picks are Kuala Lumpur Kepong Bhd, Hap Seng Plantations Holdings Bhd, and Genting Plantations Bhd.

Meanwhile, RHB Investment Bank Bhd is maintaining an “underweight” call, but raised the CPO price assumptions to RM4,000, RM3,700, and RM3,000 per tonne for 2021, 2022, and 2023, respectively. It believes valuations would be held back by environment, social, and governance concerns, resulting in plantation stocks trading significantly below their historical valuations.

The year 2022 would also see Bursa Malaysia Derivatives continuing with its night trading session for the key palm oil futures contract and other products in order to attract local and foreign market participants.

The industry would be stepping into 2022 armed with two years of experience operating in the unprecedented pandemic times. Hence, Omicron or any other future variant should be manageable, as long as they do not impact the arrival of foreign labour.

“It is well understood that Covid-19 has severely affected labour supply in the oil palm sector, which has greatly impacted production. We hope the emergence of the new variant would not cause further delays of the arrival of foreign workers,” the Malaysian Palm Oil Board director-general Datuk Dr Ahmad Parveez Ghulam Kadir told Bernama.

As the production is set to increase, CPO prices, in general, would likely average lower.

According to Ahmad Parveez, details on the 2022 outlook would be discussed during the Palm Oil Economic Review and Outlook Seminar 2022 to be held on Jan 13, 2022.

He, however, opined that the Omicron threat would not significantly affect demand which would remain strong even if the variant were to cause another wave.

In other developments, the government has also revealed that it will scale up the use of palm oil-based biodiesel under the 12th Malaysia Plan, from the current B7 and B10 biodiesel to B15 and B20.

The government plans to fully move on to the use of B30 biodiesel by 2025.

The Edge Markets

Tags: prices, Production, palm oil, labour crunch, Malaysian Palm Oil Board, plantation