Piloting Palm

Malaysia

Economic News

22 Jul 2010
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Participants at the 2006 Palm and Lauric Oil Conference in Kuala Lumpur this week will be discussing hot topics like price stability and bio-diesel - but amid a recent spate of negative publicity, they will also be looking to set the record straight on palm oil's environmental impact.



It is no accident that the conference, dubbed POC2006, is being organised by the Bursa Malaysia stock exchange in Kuala Lumpur. Malaysia exports over 50% of the world's total palm oil production, while the government and private organisations have been instrumental in bringing bio-diesel to the market.



Little wonder then that a strong and stable price outlook is on the agenda for POC2006. With such a wide exposure to the commodity, fluctuating prices could cause disproportionate harm on export receipts and the many plantation stocks listed on Bursa Malaysia.



Indeed, in 2005 bio-diesel was the best news for the sector in a year when prices looked flaccid, to say the least. The average price through 2005 was RM1400 ($376) per tonne, down from an average price of RM1610 ($432) per tonne in 2004.



However, with EU regulations requiring the use of fuel crops, rapeseed oil producers there are unable to meet demand, creating a need for an alternative. As the cheapest quality substitute, palm oil stocks have rallied and prices have been on an upward trajectory ever since. Some reports are of futures contracts for early 2007 trading at RM1700 ($456).



The hype around bio-diesel has led to a rapid expansion in blending plants by Malaysian firms. Ten are expected to become operational in 2006 with a total capacity of 800,000 tonnes per annum. Further plants involving Malaysian companies are planned in Rotterdam.



It is not just Europe that can keep demand up and prices buoyant though. With global hydrocarbon prices set to stay high, interest in alternative fuels is on the up around the globe. Whether palm oil is directly involved or not, according to analysts it will stand to benefit since any increase in demand for competing oils will potentially leave a gap in the market for edible oils or fuel crops, which palm oil can fill.



Steps towards price stability also took a step forwards with a pact between Malaysia and Indonesia, the world's second-largest producer of palm oil. The move aims to prevent unhealthy and disruptive competition between the two, which between them produce 80% of the world's palm oil, worth a combined total of some RM58bn ($15.6bn).



"A stronger relationship with Indonesia will help us to co-ordinate our moves and ensure a level playing field for palm oil to compete against other oils like soya and rapeseed," explained Yusof Basiron, CEO of the Malaysian Palm Oil Promotion Council (MPOPC), when speaking to OBG recently.



Leveraging the demand for bio-diesel is part of a clear strategy by the government to head-off other pressures on prices, particularly tariffs on the commodity in India.



"The challenge is that buyers like India are using their size as leverage to depress the price using duties," continued Yusof. "They will collect a lot of revenue from this which they will use to subsidise their oil-seed farmers and produce more of their own products. This will further reduce demand for palm oil and start another cycle of downward pressure on prices."



Yet although the strategy for price stability is clear, another concern has reared its head recently.



"What's disturbing now are so-called environmental NGOs taking matters to the extreme," continued Yusof. "They have very extreme views and misrepresent the image of palm oil in a negative way."



The main worry came from Friends of the Earth, a UK-based group, which released a report called "Greasy Palms" in September 2005. Although the main thrust of the criticism was directed at the Indonesian palm oil sector, Malaysia was daubed as well, provoking responses from MPOPC, the Malaysian Palm Oil Board (MPOB) and the Malaysia Palm Oil Association (MPOA).



In a series of open letters and press releases, these organisations have sought to address the accusations which they claim do not reflect the situation in Malaysia.



Among the various claims made in the report is one that large areas of rainforest, the habitat for a wealth of diverse species, are being destroyed to make room for oil palm plantations.



The Malaysian palm oil community has been quick to reject this claim, saying that the bulk of land converted to oil palm cultivation actually came as a result of replanting from other tree crops such as rubber, cocoa and coconut.



In line with conservation and sustainable development goals, clearing of primary forest is strictly prohibited unless logged over. Meanwhile, the growth rate of land devoted to palm oil cultivation has actually shrunk.



Among a number of other allegations, Malaysian palm oil firms are accused of clearing land for logging profits as well as "burning-off" - using fires to clear vegetation from land before planting - which contributes to air pollution.



The European press then picked up the report, and articles have followed from leading columnists expressing concern about palm oil production in Malaysia.
Yet, "The palm oil industry here is well organised and well managed and there is no way we are not practicing sustainable environmental management," said Yusof.
The outlook from the Malaysian end of the argument is that they have been unfairly lumped in with other palm oil producing countries which do not practice or enforce the same sustainable techniques and ignore international environment agreements to which Malaysia is a signatory - such as the Convention on Biological Diversity (CBD) and the International Tropical Timber Agreement.



"This perception has to be corrected and it will take a lot of efforts to explain our position and give the true picture," continued Yusof. "Otherwise, these people are just like any other economic saboteurs who stop a developing country coming up with good products and decent earning capabilities. I hope their intention is not to damage our economy and make us to come back with a begging bowl... They should be more guarded with their comments."



The MPOPC response to this attack on palm oil's environmental impact is the first step in a campaign to brand palm oil internationally. The nutritional benefits of the oil are also set to be promoted more, while its impact on health relative to other competing oils, such as soya oil, will hopefully mean that producers don't just have to rely on bio-diesel to keep up demand.

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