Challenging times ahead for palm oil industry

The rapid growth of the palm oil industry has brought about many new challenges to the sector's future sustainability and competitiveness.

For Malaysia, making inroads into new markets is always crucial for the 20 millions of tonnes of crude palm oil (CPO) that is produced each year.

But, this is no mean feat as Indonesia, the world's largest palm oil producer, and the commodity’s closest substitute, soybean oil, offer stiff competition to the golden crop.

The scenario today is one of low prices for the commodity, which is exported to about 150 countries which depend on palm oil for their supply of vegetable oils and fats for cooking, frying, making margarine and bakery fats.

Phillip Futures Sdn Bhd Derivatives Product Specialist David Ng said lower prices would mean higher offtake as more countries, especially the poor ones, would be able to purchase the edible oil for their consumption.

"However, low CPO prices will usually affect plantation margins which then require companies to embark on cost reduction practices.

"To top it off, increasing competition from Indonesian plantation companies are pressuring local companies," he told Bernama.

Ng said the decision to extend zero export tax on CPO might deem as a good move but Indonesia will soon follow suit.

"This action encourages aggressive competition and could affect local players that are not as competitive as their counterparts in neighbouring countries," he said.

The Malaysian government also exempted the 4.5 per cent export tax on CPO from Sept 1, 2014 until Feb 28, 2015 to boost exports and reduce inventories and this in turn would impact local CPO prices positively.

Ng also said 2014 marked a new paradigm shift as the West Texas Intermediate (WTI) crude oil slumped to multi-year lows, spurred by abundant supply and weakening demand.

This had a negative impact on CPO as higher crude oil prices deterred biodiesel demand especially discretionary blending demand.

"Even for biofuel producers, some may find it difficult if world crude oil prices continue to deteriorate, however, one major factor to be watched closely is the weather development," he said.

For 2014, CPO prices fluctuated between RM1,900 per tonne and RM2,800 per tonne, having lost roughly 18 per cent, year-to-date, owing to several negative developments in the market.

Against this backdrop, Ng said, he would likely see a recovery of demand from China amid a slower demand in 2014.

"We reckon India and Pakistan will maintain their palm oil consumption at current levels as we don’t see much increment from these two countries, going forward.

"However, we have to be cautious with the development in the vegetable oil market especially with sun oil, rapeseed oil and bean soyoil prices," said Ng.

Narrowing spread between these competing vegetable oil prices with palm oil prices could affect potential demand, he said.

Felda Global Ventures Holdings Bhd Group President and Chief Executive Officer Datuk Mohd Emir Mavani Abdullah said it was crucial to consider proven long-term demand and growth opportunities for palm oil.

"It is likewise the same for specialty oils, fats and chemicals that far outweigh the challenges being faced by plantation companies like FGV.

"Exposure to volatile commodity prices, competition from alternative oil crops and challenges in land bank investment – whether domestic or abroad – are a constant feature of the business environment that all plantation companies have to operate within," he said.