This article first appeared in The Edge Financial Daily on July 10, 2018
KUALA LUMPUR: With numerous challenges dominating Malaysia’s palm oil industry, all eyes are on Teresa Kok as she officially begins as the minister of primary industries.
Against this backdrop, The Edge Financial Daily spoke to industry players on their hopes and concerns for the sector, one of the most significant contributors to the nation’s gross domestic product.
Breaking into new markets
Malaysia, being the world’s second-largest producer of palm oil, exports most of its palm oil to India, the European Union (EU), and China, according to official statistics gathered by the Malaysian Palm Oil Board.
In 2017, India imported 2.03 million tonnes of palm oil from Malaysia, followed by the EU at 1.99 million tonnes and China at 1.92 million tonnes. This altogether made up nearly 36% of the country’s total palm oil export volume.
Now, given the EU’s stance against palm oil, and stagnant demand from the Indian and Chinese markets, the need to identify new markets must remain at the top of Kok’s agenda, according to a senior analyst.
“It is important that the minister continues leading the search for new markets for further expansion, even more as production traditionally rises over the third quarter of the year amid the relatively high inventory levels,” Sam Yen of Palm Oil Analytics told The Edge Financial Daily.
Yen said coupled with intensified competition from Colombia and Ghana, which leaves a number of countries out of the equation, Malaysia should begin by diversifying away from the big markets and looking at its own backyard — countries like Myanmar and Vietnam where demand growth is evident.
Other markets that the Malaysian palm oil industry could look at is the downstream sector and greater adoption of biodiesel.
“The volatility of the market, and tariff and non-tariff barriers emphasise that just producing palm oil as a commodity is no longer enough. Adding value through innovative downstream activities is imperative,” said industry veteran M R Chandran.
Clocking in on her first day as primary industries minister last Monday, Kok, also Seputeh member of parliament, said the ministry’s priorities include increasing the number of high-value-added products from the downstream plantation commodities.
“The exports of downstream goods fetch better prices and value, as opposed to selling just raw materials,” said Yen, adding that the move to downstream could also counteract the hike in minimum wage, if any.
Simply put, the increase in wages would place Malaysian crude palm oil (CPO) at a greater disadvantage to Indonesia as fresh fruit bunch (FFB) prices would rise in tandem with costs, especially since Indonesia is not pressed with an issue of rising wages.
Big boys in the industry such as Sime Darby Plantation Bhd also expressed concerns over the proposed implementation of minimum wage.
“We will continue to collaborate and engage with the ministry as well as government agencies on various issues concerning the palm oil industry, including the proposed implementation of minimum wage to ensure we can strike a balance between productivity and cost of operations,” said its executive deputy chairman and managing director Tan Sri Mohd Bakke Salleh in an email correspondence.
Also, Malaysia currently has a biodiesel mandate for B7, a petroleum diesel blend comprising 7% palm methyl ester. The mandate has stayed unchanged since December 2015, although the former federal government had intended to roll out B10 as early as June 2016.
On the other hand, Indonesia has planned to make it mandatory for biodiesel to have a bio-content of at least 25% from 2019, as the country pushes to boost local consumption of palm oil.
“If we can push for the biodiesel agenda, it is possible to actually divert at least 650,000 tonnes of Malaysian CPO into the market, therefore reducing our stockpile,” said Teoh Beng Chuan, chief executive officer of Palm Oil Refiners Association of Malaysia (Poram).
Tax matters
The swearing-in of a new minister has kept palm oil refiners on their toes, and one of the reasons could be the uncertainty over tax matters. To recap, Malaysia in April set a 5% CPO export tax after a four-month suspension was lifted.
Teoh said he hopes that Kok and her ministry would review the existing export duty structure, especially since Indonesia’s export duty has a competitive advantage of about US$20 (RM80.60) to US$30 per tonne against Malaysia’s.
“I think the entire framework is due for a review, not by temporarily suspending export duty. Our calculations show refining margins eroded during the period of suspension, by 20% to 30%,” he said.
This is because the duty-free exports would leave less CPO in the country for local refiners. Also, foreign refiners who bought Malaysian CPO would compete against locals in the international arena, intensifying competition when margins are already low.
However, Yen differed on this, as he observed Malaysia’s palm oil inventory levels are high by historical standards, suggesting an overhang in the market.
“What the export tax freeze had done that benefited Malaysia was, during January to April, Malaysia basically took some market share from Indonesia,” Yen added.
While Kok has given the usual high-level directives, Yen believes specific directions on the tax freeze should follow, and that suspending the export tax for the rest of the year would help to boost exports — especially if inventory levels still remain high, or export figures weak — and since the ideal inventory level of 1.6 million tonnes mooted by Kok’s predecessor, Datuk Seri Mah Siew Keong, to boost prices had yet to be achieved.
As at end-May, Malaysia’s palm oil inventory stood at 2.17 million tonnes, while the benchmark palm oil third month contract closed yesterday at RM2,273 per tonne, down 11.5% from a year ago.
Sustainability and safety
Most expect Kok to carry on with her predecessor’s high-level lobbying against the EU’s anti-palm oil campaign, as she has acknowledged the need to do so herself.
However, the ministry’s decision on the Malaysian Sustainable Palm Oil (MSPO) standard, set to be mandatory by next year, currently lacks clarity.
“It cannot be denied that this will be a daunting task and there will be challenges in achieving this goal,” said Chandran, adding that smallholders should be given more support and technical assistance to meet sustainability objectives.
“The complexity of the palm oil supply chain and the large number of players including policymakers and governments necessitate collaborations for maximum leverage and impact. Once the baseline parameters of MSPO are achieved, companies will be better equipped to move forward to a more stringent international standard such as the Roundtable on Sustainable Palm Oil,” he said.
Additionally, the findings that the highest levels of 3-MCPDE (3-Monochloropropane-1, 2-diol esters) and GE (glycidyl esters) in palm oil, compared with those of other edible oils, need serious attention, said Chandran.
He added that a concerted effort is needed to reduce these contaminants in palm oil, including the reduction or prevention of precursors such as diglycerides and free fatty acids in the FFB prior to processing, the modification of oil refining conditions, as well as the introduction of new oil refining and post-refining steps such as using suitable adsorbents.
Good leaders are good listeners
With a newly formed ministry, industry experts and players hope their voices will continue to be heard under Kok’s leadership.
“Mah as a minister was a good listener. We hope there will be consistent dialogues and healthy communication before decisions are made or policies formed,” said a plantation player on condition of anonymity.
Sharing similar sentiments, Federal Global Ventures Holdings Bhd chairman Datuk Wira Azhar Abdul Hamid said he hopes for the formation of a task force led by the government and the private sector to address the industry’s current reputational challenges.
He added that the need for a comprehensive review and overhaul of government agencies and organisations should be made to address today’s many overlapping roles and functions.
“We hope that the new ministry will continue to support the industry in areas of mechanisation and digitalisation, and also other priorities including the continued efforts to counter and manage the impact of anti-palm oil sentiment in the EU and other Western countries, as well as opportunities to further penetrate major markets through government-to-government initiatives, to increase trade volumes,” said Mohd Bakke.