Biofuels, Crude Palm Oil, Malaysia

2006 Malaysian Palm Oil Market Summary

August 13, 2007 (TheEdgeDaily.com) — Kuwait Finance House Research said agriculture has been an important sector of the Malaysian economy, providing the impetus for economic growth in the past few decades and contributing to higher rural incomes.

In 2006, Malaysian agricultural exports rose to RM42.1 billion (2005: RM37.4 billion) or 7.15% (2005: 7.1%) of Malaysia’s total export value.

Palm oil, being the largest contributor to the agricultural sector, recorded strong export earnings of RM21.6 billion or 51.4% of total agricultural exports value during the year, propelled by continuous R&D efforts to boost industry output and productivity.

The past two years have also seen Malaysia achieving milestones, especially on the biofuel front. Currently, there are five biodiesel plants in the country, with an additional five plants expected to come onboard by year-end.

Global efforts to reduce the dependency on fossil fuel, coupled with Malaysia’s advantage in the palm oil industry will see the country continuing to pursue further biofuel initiatives.
2006 review and 2007 outlook

The palm oil price touched this year’s high of RM2,886 per tonne on June 6, driven by expectations of a supply shortfall and rising global demand.

We think the palm oil price has reached its peak and is projected to trade between RM2,300 and 2,400 per tonne for the rest of the year. For full-year 2007, the palm oil price is expected to remain firm, averaging at RM2,300 per tonne (2006: RM1,900 per tonne), driven by the following factors:

• The Malaysian biofuel project, when fully implemented in 2008, is expected to absorb up to 500,000 tonnes of palm oil per annum. Malaysia has also agreed to set aside up to 40% (about six million tonnes) of the country’s total palm oil production for biodiesel.

• Increased demand for palm oil from China with the abolishment of palm oil import quota will see the country buying an additional one million tonnes per year of palm oil in the next few years.

• Robust economic growth, higher edible oil consumption and the removal of palm oil import quota in India will see higher demand for palm oil. Palm oil exports to India rose by 10.7% y-o-y in June 2007.

• Lower import duty on processed palm oil in line with Asean Free Trade Area (Afta) agreement commitment will see increasing palm oil demand from Vietnam.

• Higher projected growth of global demand for vegetable oils (to 169 million tonnes per year by 2020 versus today’s 90 million tonnes per year).

• Increasing worldwide demand for biodiesel will ensure increasing demand for palm oil (palm oil being a cheaper material input for biodiesel production compared to soya oil).

Planted area

Over the past two decades, Malaysia’s total oil palm planted area increased from 640,000 hectares in 1975 to 4.17 million ha in 2006. In 2006 alone, the total oil palm planted area increased 2.8% y-o-y, driven mainly by Sabah and Sarawak with a combined growth of 4.5% versus Peninsular Malaysia’s 1.6%.

Sabah has the largest oil palm planted area at 1.24 million ha, accounting for 30% of Malaysia’s total oil palm planted area in the country. Matured areas stood at 3.5 million ha or 87.5% of Malaysia’s total planted area in 2006.
Palm oil production

In 1H07, palm oil production stood at 6.68 million tonnes, 8.03% lower than 1H06’s 7.26 million tonnes. This was mainly due to floods in the southern peninsula states during early 07 (palm oil output fell by 21.4% y-o-y to 1.05 million tonnes in Johor in 1H), excessive rainfall in the past six months as well as a dry season in June 2007 in major producing states, thus reducing the country’s total palm oil production.

Reflecting lower palm oil production, FFB yield per ha was lower at 8.15 tonnes in 1H07 compared with. 9.05 tonnes in 1H06, while the oil extraction rate (OER) fell to 20.08% in

June 2007 against 20.31% in May 2007.

Nevertheless for full-year 2007, we project palm oil output to trend slightly higher by 3.8% y-o-y to 16.5 million tonnes, boosted by peak production cycle in 2H07.
Palm oil exports

For full-year 2007, we expect palm oil exports to trend higher to 20.89 million tonnes, with total palm oil export earnings of approximately RM46 billion (with the assumption that palm oil price averages at RM2,200 per tonne in 2007).

We expect higher palm oil demand this year from Vietnam (due to lower import duties on processed palm oil); the US (with the new trans-fat labelling law; and Jordan due to re-exports to the Iraqi market.
Catalysts for plantation sector

Plantation sector merger

Last year, Malaysia announced a mammoth plantation merger which will result in the largest listed palm oil company in Southeast Asia and the world. The combined entity is expected to have an estimated market capitalisation of RM75.5 billion, planted estates of 511,000 ha, plantation landbank of 578,337 ha and produces 5% to 6% of global CPO output.

The research house is positive about this merger as the entity is expected to derive economic synergies and economies of scale by ensuring optimal production, cost cutting/ savings and optimal capital usage. It maintains its aggressive outlook for a buoyant year for palm oil in 2007.
Biodiesel outlook

Malaysian Palm Oil Council (MPOC) said palm oil is suitable for use as second-generation biofuel in reducing carbon dioxide emissions by more than 80%, provided the processing stages are finetuned.

Output is largely meant for exports to Europe, the US and Japan. Excess output will be marketed locally through the B5 blend under the Malaysian Biofuel Policy.

The industry is mainly driven by surging oil prices that have stimulated the industry worldwide. Generally, biofuel plants are growing at a dizzy rate supported by strong demand from the US, Europe and other parts of Asia to reduce dependence on crude oil, reduce greenhouse gas emissions and boost agriculture.

Although the expansion and the importance of the biofuels industry are currently on the radar, the reseach house says the industry may not grow as fast as expected due to rising feedstock prices.
Economic considerations on biofuels

Vegetable oils form 80% to 90% of the biodiesel production cost, therefore, the cost of feedstock plays a crucial role in the biodiesel vs. fossil fuel diesel competition.

If palm oil prices stay at US$500 (RM1,738) per tonne and crude mineral oil at US$60 per barrel, the subsidy required to make biodiesel competitive versus petroleum diesel is US$1.25/litre.

This is possible through subsidies provided by the government to biodiesel producers or by reducing the diesel subsidy at the retail level, hence the cost is passed on to consumers.

Palm biodiesel will be attractive if the palm oil price stays below US$450 per tonne and crude oil prices stay above the US$70 per barrel (US$514 per tonne).
Possible solutions include:

• Allowing market forces to set the price of petroleum diesel;

• Legislation to make it mandatory to use biofuels blends. For example, EU countries used 4.5 million tonnes of biodiesel in 2006. This is expected to rise to about 6 million tonnes in 2007, and a mandatory 5.75% blending will take effect by 2010;

• Alternatively, the Malaysian government may cap palm oil prices at RM2,600 per tonne for its biofuel needs to ensure that prices remain competitive compared with fossil fuels. While this cap may not apply beyond the need of the biofuel industry, it is a bit of a dampener for industry players who may be forced to commit a percentage of annual production for biofuel purposes.
Outlook

From 2007 to 2012, the demand for vegetable oils is expected to increase by three million tonnes to 21 million tonnes due to relentless efforts in promoting the expansion of the global biodiesel industry.

The projected increase far exceeds the demand for food consumption by 40% to 60%. Due to competitive pricing, palm oil largely contributes as a cost-effective feedstock for biodiesel production.

Nevertheless, the growing demand for biodiesel is expected to counter the drawbacks of palm oil-based biodiesel. Meanwhile, palm oil exports from Malaysia and Indonesia are expected to surge moving forward as the palm oil-based biodiesel industry worldwide expands.

In conclusion, palm oil-based biodiesel seems to be the most competitive in terms of price and versatile in terms of usage. Malaysia and Indonesia, being the largest palm oil producers in the world, are in the best position to capitalise on biodiesel demand in the long term, hence creating a market with immense potential.

Moving forward, Malaysia is expected to take the lead in terms of palm oil-based biodiesel due to the country’s supply, increasing prices and energy yields produced from palm oil-based biodiesel as compared with other vegetable oils.

Nevertheless, palm oil-based biodiesel will not take off as early as expected due to the costs involved for the development and expansion of the industry with the upsurge in palm oil prices stemming from the shortage of supply.

Advertisements
Standard

4 thoughts on “2006 Malaysian Palm Oil Market Summary

  1. Christian Eze says:

    EMMY RICH NIGERIA LIMITED,a registered company in
    Nigeria founded in the year 2000.We are proud to
    introduce our
    numerous edible oil offer for sell to the market at
    large.We have millions of barrel of edible oil for
    sale,we sell in large and small quantity and we give
    discount for bulk purchases and our requirement meet
    the general buyers request.

    We are edible oil manufacturer
    and we also import from numerous companies from the
    world
    with quality oil products.We deal with export of
    edible oils to anywhere
    in the world, we deal in all kinds of oil such as Palm
    oil, Vegetable oil, Sunflower oil, grains and
    cereals e.t.c.Our production capacity is 10,000MT per
    month and more.Our customer satisfaction is our priority.
    Contact us for your order enquiry.
    You are welcome.
    Engr.Christian Eze.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: