Malaysia: Slight recovery for palm oil

The Malaysian palm oil market is expected to remain uncertain and experience only a little growth in 2023. 

This is due to concerns of global economic slowdown and uncertainties in weather patterns, the impact of war in Ukraine as well as the risks of inflation, said Malaysian Palm Oil Board (MPOB) DG Datuk Ahmad Parveez Ghulam Kadir. 

Crude palm oil (CPO) prices are expected to be lower this year on expectations of weaker prices of other competing oils due to higher supply availability of oils and fats in the global market, as well the strengthening of the ringgit against the US dollar. 

“There will be a high volume of CPO production, driven mainly by favourable weather conditions and improvement in the labour situation as the application for foreign workers has been approved in stages,” Ahmad Parveez told The Malaysian Reserve (TMR). 

Meanwhile, Maybank Investment Banking Group Research (Maybank Research) said there would be some palm oil production recovery in 2023. 

“Oil World, in its latest forecast, is expecting global palm oil output to grow by 2.9 metric tonnes (MT) to 80.2MT from October 2022 to September 2023. 

“Similar to the start of 2022, the market is once again anticipating record supply of South American (SA) soybean planting and eventual harvest in early-2023 to bring about ample supply of global vegetable oils,” it said in its report entitled “Divergent Fortunes: Macro Deceleration vs Market Revival”. 

Maybank Research said the present risk to the country’s 2023 CPO average selling price (ASP) forecast of RM3,400 per tonne is on the upside. 

“Concerns are La Nina’s impact on SA harvests, lower-than-expected CPO yield and higher B35 mandate by Indonesia. 

“There is still much uncertainty in the current normalised supply forecast by the market as La Nina is still here although the weather may turn more neutral by end of the first quarter of 2023 (1Q23) and it remains unclear if Malaysia-based planters will get sufficient foreign workers in 2023 to boost output,” it said. 

Similar to 2022, it said CPO price trend would likely be a year of two halves in 2023, but with lesser volatility and intensity. 

“CPO price is likely to start off well in 1Q23 at around RM4,000 per tonne due to the low yielding cycle and the present heavy rainfall disrupting operations in selected areas. CPO price is likely to stay supported until SA’s soybean harvests enter the market towards March and April 2023. 

“A weaker-than-expected SA harvest may bring price support in 2Q23. Conversely, a strong SA harvest may just escalate the correction in CPO price by mid-year as palm oil is anticipated to enter its seasonal peak output in the second half of 2023 (2H23). 

“We are keeping our CPO ASP forecast of RM3,400 per tonne for 2023 premised on a good SA soybean harvest and the cost of production to remain under control, assuming fertiliser prices continue to ease,” Maybank Research added. 

The realisation of a higher biodiesel mandate of B35 (from B30) as mooted by the Indonesian government recently, weaker-than-expected SA soybean harvest, and high fertiliser prices are potential trigger points for upgrade to CPO ASP forecast. 

“The downside to CPO price is presently buffered by above-average CPO price discounts to competing vegetable prices,” it said. 

The research house anticipates merger and acquisition (M&A) activities to regain momentum in 2023. Its preferred ‘Buy’ are Kuala Lumpur Kepong Bhd (KLK) and Ta Ann Holdings Bhd (TAH). 

“The KL Plantation Index has broadly mirrored the sharp correction in CPO price in 2H22. Positively, the financial positions of planters have improved sharply following good CPO prices over the past two years. This will allow planters to comfortably raise their dividend payouts if investment opportunity remains lacking.

“Within our coverage, TAH, Sarawak Oil Palms Bhd (SOP) and TSH Resources Bhd (TSH) are expected to be in net cash position in 2023. We maintain our ’Neutral’ sector call,” it said. 

Meanwhile, Melaka-based cacao farmer Simon Ting expects a negative margin in 2023. 

“Previously, our margin was at 15%. The future is bleak for cacao farmers due to too much rain, which is not good for flowering. 

“The price of fertiliser is at record high. In 2016, a bag of 50kg of fertiliser was priced at RM110, now it is RM245 for the same amount. 

“If I was not intercropping with coconut to cover the expenses, I would have chopped down cacao trees a long time ago,” Ting told TMR. 

A padi planter in Perlis, meanwhile, is also not optimistic of a good year. Fahmi Marzuki said while the rain has been a blessing so far, he is discouraged by the increasing prices for good quality seeds and organic fertiliser. 

“The weather is also a concern as drought can set in later in the year and dry up the fields.” 

Palm oil has been bombarded with negative criticisms, especially from the European Union (EU), the third-largest importer of Malaysian palm oil. 

Ahmad Parveez said the challenges will continue, especially from other vegetable oil-producing countries that take a protectionism approach, considering that palm oil is nutritious, highly versatile and can be offered at a competitive price. 

Among the current challenges are the amendment of the Renewable Energy Directive (RED II), the European Green Deal, the setting of a lower minimum level of food contaminants such as 3-monochloropropanediol ester (3-MCPDE) in palm oil, the anti-palm oil campaign, accusations of forced labour practices, and labour shortage. 

“The implementation of RED II amendments and complementary regulations, namely the Delegated Act by the EU to exclude the use of palm oil as biofuel by 2030 by categorising it as a raw material that has higher risk of indirect land use change (ILUC). 

“Therefore, the use of palm oil as biodiesel will not count towards the achievement of the EU’s renewable-energy (RE) targets and will not be eligible for financial assistance, for instance, subsidies under RED II,” he added. 

In addition, Commission Regulation (EU) 2020/1322 on Sept 23, 2020, amended Regulation (EC) No 1881/2006 regarding the maximum level of 3-MCPD. 

The EU also agreed on a new regulation on Dec 6, 2022, namely the EU Deforestation Regulation (EUDR), to prevent companies from placing commodities linked to deforestation and forest degradation onto the EU market, or exporting them from the EU. This new regulation involves commodities including palm oil, cocoa, coffee, soya, timber and rubber. 

“Taking into account that these products need to be subjected to a due diligence process, which will add to the administrative burden and higher production costs, palm oil price is expected to be higher and less attractive compared to rapeseed oil produced by the EU,” he said. 

Furthermore, there is ongoing discussion regarding exposure to mineral oil hydrocarbons through food intake. Currently, there are no legal limits for mineral oil saturated hydrocarbons (MOSH) and mineral oil aromatic hydrocarbons (MOAH). 

However, food and related industries were advised to take the necessary actions as the World Health Organisation (WHO) and the European Food Safety Authority (EFSA) are expected to make decisions about the contaminants. 

“Sources of mineral oil hydrocarbon pollution include petroleum-based lubricants, greases and release agents used in the food manufacturing process. Therefore, this will be a challenge for the oil palm industry,” Ahmad Parveez said. 

In the US, Malaysian plantation companies have also come under fire on allegations of forced and child labour. These allegations not only tarnish the image of the industry, but it creates a domino effect in the market as it discourages US importers from taking Malaysian palm oil to avoid seizures by the US Customs. 

With regard to RED II, Malaysia has filed a case at the World Trade Organisation (WTO) against the EU, as well as France and Lithuania, for policies that discriminate against palm oil against other vegetable oils for biofuel production in January 2021. Malaysia is still waiting for the outcome of this case. 

On 3-MCPD and GE, effective from Jan 1, 2021, the Malaysian palm oil industry has been complying with the maximum requirement of 3-MCPD at 2.5 ppm and GE at one ppm for processed palm oil; and 3-MCPD at 1.25 ppm and GE at one ppm for processed palm kernel oil. 

Strength: Strong support from the government in dealing with issues related to the oil palm plantation sector, assisted by excellent research and development to increase productivity. The resumption of foreign labour intake is also expected to help increase the oil palm productivity in 2023. 

Weakness: Poor participation of local workers, particularly for harvesting and fresh fruit bunch (FFB) collection activities. Thus, any changes in policy related to foreign workers may cause disruption in labour supply. 

Opportunity: The acute labour shortage, which occurred during the Covid-19 pandemic, has led oil palm industry players to seriously embark into mechanisation and automation. In terms of market opportunity, the ratification of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) on Sept 30, 2022, has broadened Malaysia’s access to new markets such as Canada, Mexico and Peru, which are not covered by any existing free trade agreement (FTA). 

Through this arrangement, Malaysian palm oil products are guaranteed better market access through the elimination or reduction of import duties and more flexible rules of origin by the trading partner countries involved, compared to countries that do not have an FTA. 

Threat: Negative allegations towards oil palm sustainability, especially among western communities, are expected to continue. 

Labour shortage: Mechanisation, automation and digitalisation of the processes within the oil palm industry, mainly on harvesting FFB and general works to maintain the crops, are seen as the long-term solution to its operational needs. Malaysian Employers Federation (MEF) president Datuk Dr Syed Hussain Syed Husman said, however, these processes take time and require heavy capital investment. 

“The government should assist and incentivise the oil palm industry players, especially the estimated 500,000 smaller operators to adopt and implement mechanisation, automation and digitalisation. 

“With worker shortages, the harvesting cycle is extended to 90 days from the usual 10 to 15 days. This deteriorates the quality of the crude palm oil. The estimated losses may exceed RM20 billion by the end of 2022. 

“The oil palm industry requires specialised workers, especially those who can harvest older oil palm and workers from Indonesia are more suitable to do harvesting of fresh fruit bunches,” he said. 

About 80% of workers in the oil palm sector are foreigners. With a shortage of about 120,000 foreign workers, the production of FFB fell by 25%.

Tags: Ukraine, Indonesia, prices, MPOB, Crude palm oil, Production, Malaysia, palm oil, inflation, Market, CPO