KUALA LUMPUR – The palm oil industry marked its third year with a wide gap in recruitment issues, although demand and prices of crude palm oil (CPO) remained elevated in 2022 due to geopolitical risks and as the country entered into the endemicity phase of COVID-19.
Production, stocks and export signaled some recovery albeit at a lower success rate. Perhaps, it could have been higher if the required labor in the plantation sector was met.
Off to a flying start
The industry started the year with strong momentum, with higher CPO prices and export revenue from 2021.
However, come February 2022, it was being pressured to meet the demand following the Russia-Ukraine war that disrupted the global supply chain of sunflower oil.
Together, Russia and Ukraine accounted for about 75 per cent of sunflower oil, a primary cooking oil in many parts of the world.
Just when the whole world was stocking up on the edible oil amidst soaring global food inflation, Indonesia, the number one palm oil producer and exporter, announced its decision to ban palm oil exports in April to ensure the availability of food products at home.
This saw Malaysia’s CPO price hit a record high of RM6,873.00 per ton in May, with palm oil stocks below two million tons and exports up by 2.8 per cent to 11.47 million tons from 11.15 million tons in the first half of the year.
The euphoria, however, was short-lived. Three weeks later, Indonesia lifted its palm oil export ban.
Putting the rivalry aside, under the Council of Palm Oil Producing Countries, both Indonesia and Malaysia — the world’s first and second largest palm oil producers and exporters — aggressively engaged with the European Union (EU) over the unfair and discriminatory claim on palm oil being the major cause of deforestation.
Recently, a provisional agreement on the European Commission’s Proposal for the Deforestation-Free Products Regulation had been reached but Malaysia would continue to engage with the EU regarding the new regulation and future implementing rules.
This, according to the Malaysian Palm Oil Council, is to ensure that the rules are not discriminatory and that reliance on Malaysian Sustainable Palm Oil means compliance with the due diligence requirements.
The Malaysian government has also officially ratified the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) on Sept 30, 2022, and that is expected to broaden its access to new markets such as Canada, Mexico and Peru, which are not covered by any existing free trade area.
Apart from increasing palm oil export to the markets, the elimination of tariffs is expected to increase Malaysian palm oil competitiveness in CPTPP member countries.
Malaysia’s main export markets have always been traditionally India, China and the EU but over the past few years, the sector has been proactively looking to break away and drive growth in new markets, including the Middle East.
CPO production, stocks, exports and price
Based on October 2022 data by the Malaysian Palm Oil Board (MPOB), Malaysia’s CPO production for January-October 2022 showed a slight improvement compared to the same period in 2021.
It said during the said period, national CPO production recorded 15.15 million tons or increased marginally by 0.8 percent from 15.03 million tons attained in the corresponding period of 2021.
“Year-on-year, palm oil stocks in October 2022 increased by 0.57 million tons or 31.0 percent to 2.40 million tons compared to 1.83 million tons in October 2021, driven by higher CPO production and palm oil imports by 0.8 percent and 5.0 percent, respectively.
“In addition, higher opening palm oil stocks at the beginning of 2022, up by 0.35 million tons or 27.6 percent compared to the opening palm oil stocks in 2021, had also contributed to the higher palm oil stocks in October 2022 compared to October 2021,” MPOB Director General Datuk Dr Ahmad Parveez Ghulam Kadir told Bernama.
He said that during the 10 months of 2022, exports of palm oil and other palm-based products had increased by 1.8 percent to 20.14 million tons from 19.79 million tons during the same period in 2021.
Higher prices of palm oil during the said period had influenced the total export revenue, which boosted to RM110.75 billion from RM80.40 billion in January-October 2021 or surged by 37.7 percent.
Exports of palm oil alone increased slightly by 0.4 percent to 12.73 million tons during January-October 2022 from 12.68 million tons previously.
Due to the higher prices, export revenue of palm oil increased sharply by 36.3 percent to RM73.58 billion from RM54.00 billion during the corresponding period in 2021.
CPO price during January-October 2022 was traded higher by 23.1 percent or RM988.00 to RM5,264.50 per ton as against RM4,276.50 per ton in January-October 2021, influenced by higher soybean oil and firmer Brent crude oil prices in the world market.
The improved prices were also attributed to the weaker ringgit against the USA dollar, making palm oil prices more competitive than those of other competing oils, Ahmad Parveez said.
For the whole year, the CPO price is expected to average at RM5,000 per ton, higher by 13.5 percent compared with RM4,407 per ton in 2021, on the back of the Russia-Ukraine crisis, labor shortages and strong palm oil demand.
Production is projected to improve slightly by 2.1 percent to 18.50 million tons in 2023 compared with 18.12 million tons in 2021, due to the expected increase in the mature planted area and favorable weather conditions.
Acute labor shortage
The Malaysian palm oil industry is facing and is expected to continue facing many challenges next year. The main hurdle is undoubtedly the shortage of labor, which has become a perpetual issue in the oil palm plantation sector.
The severe shortage of labor not only disrupted the harvesting process but also affected the manuring program of the estates as the existing workers during those times were diverted to focus more on harvesting.
“Since the temporary suspension of foreign worker hiring was lifted this year, production is expected to improve. However, if the manuring program was disrupted, this might limit the improvement in production because the impact of manuring generally can only be seen after 16 to 18 months,” Ahmad Parveez explained.
He said that the labor shortage in the oil palm industry has driven the CPO production to be significantly lower than the potential business-as-usual scenario of nearly 20 million tons.
“The idea of replacing labor with mechanization has never been easy as oil palm plantations vary from one another, particularly in terms of topography.
“Mechanization, however, is still possible and works on certain activities in the oil palm operation,” he said.
According to the Malaysian Estate Owners Association, as of Sept 30, the total number of foreign workers deemed active in the plantation sector was 150,608 workers.
Set against Peninsular Malaysia’s total oil palm planted area of 2.6 million hectares, this would translate to labor to land ratio of 1:17.
“No oil palm estate can sustainably operate beyond the ratio of 1:14, especially if they do not or cannot mechanize,” association president Jeffrey Ong said.
He also said that stakeholders look forward to engaging with the government and the relevant authorities to expedite the process of foreign labor recruitment.
“Crops are rotting on the trees and losses continue,” he lamented.
Outlook
The labor issue, if not addressed, would continue to have repercussions for the industry.
The La Nina rainy weather would also continue to post challenges for production as it has been over the past three years.
The National Oceanic and Atmospheric Climate Prediction Centre reported that there is a 91 percent chance of the La Nina phenomenon to occur from this December to February 2023, and it may harm the palm oil quality, slow down the production and stocks level but may give a nudge to the price.
“I predicted that the weather would return to neutral weather conditions in early 2023, suggesting a relatively short-lived La Nina event. At the same time, I hope that the new Plantation and Commodities Minister Datuk Seri Fadillah Yusof will sense the urgency and fix the perennial problem of labor shortage in the oil palm industry.
“If they do, then we can expect higher output and lower prices. Supply is already at a three-year high,” Singapore-based Palm Oil Analytics owner and co-founder Sathia Varqa said.
He also said that the local currency is set to be stronger with the new government in place, making exports expensive.
This, however, may be offset by higher Indonesian palm prices inflated by levies and taxes.
In line with him, MIDF Research expects the ringgit to move forward and it foresees the local currency to average stronger at RM4.30 per US dollar and end the year 2023 at RM4.23.
The research house also expects commodities prices to remain elevated despite normalizing and forecast the CPO to average at RM3,500 per ton.
On buying demand in 2023, Sathia expects a slowdown from China.
“This is the biggest demand story in 2023. When will China open up (from its zero-COVID policy)?”
As for the outlook on price and production, he said CPO production in 2023 would be between 18.20 and 18.50 million tons based on no reduction in the application of fertilizers, especially among the smallholders, no adverse weather impact and improvement in the labor supply situation.
Price on CPO futures active month will most likely be higher at the RM4,000-4,200 levels mainly on a slower rise in production from December to the end of the first quarter of 2023. (Nurul Hanis Izmir)
Source: Bernama
