The Importance of Palm Oil to the Malaysian Economy The Malaysian palm oil industry is significant contributor to Malaysia’s overall economy, providing both employment and income from exports. According to the latest report by Ministry of Human Resource, there were about 1.7mn of workers in the agriculture, forestry and fisheries industry– the third highest after services and manufacturing sectors.
The palm oil industry alone employs approximately 431,357 workers in the estates, of which 77% or 332,135 were foreigners. Higher exports of palm oil and palm-based agriculture products contributed to the expansion in exports of agricultural goods, which expanded by 4.7% or RM3.2bn to RM70.4bn in 2016.
Last year, exports of palm oil and palm-based agriculture products increased by 5.9% to RM48.3bn, contributed by higher exports of palm oil. Exports of palm oil increased by 3.3% or RM1.3bn due mainly to higher average unit value (AUV) – 36.1% as at December 2016.
Malaysia currently accounts for 30% of world palm oil production and 37% of world exports. That put Malaysia as the world’s second largest palm oil producer and exporter after Indonesia.
The Impact of El Niño is Significant on Our Palm Oil Sector The recent episodes of El Niño has distressed Malaysia’s CPO production, as the extreme climate has intensified droughts and caused water shortages. It affects the maturation process of fresh fruit bunches (FFB) as it causes hot weather and less rainfall. According to National Oceanic and Atmospheric Administration (NOAA), 2015/16 El Niño is one of the strongest in history since 1950. Among the episodes of strongest El Niño were between 1982 – 1983 and 1997 – 1998. The El Niño cycle normally appears every two to seven years with each cycle lasting between six and 18 months.
Negative impact on production: Palm oil production contracted in most of the months in 2016, with the highest decline of -25% YoY in May 2016. In overall, palm oil production registered a 13% decline to 17.32mn tonnes compared with 19.96mn tonnes in 2015. This was largely due to the decline in fresh fruit bunches (FFB) yield to 15.9mn tonnes per hectare in 2016 (2015: 18.5mn per hectare) and lower oil extraction rate (OER) of 20.2% (2015: 20.5%). A lower palm oil inventory was also recorded with an average of 1.8mn tonnes last year as compared to 2.3mn tonnes in 2015.
Inverse relationship with CPO price: As the supply of palm oil was affected by El Niño, CPO prices has trended upwards. The average CPO price increased by 20% to average RM2,648 per tonne in 2016, with the highest level at RM3,217 per tonne at the end of December 2016.
Impact on exports earnings: The upward trend in CPO prices following supply constraint has led to higher exports of palm oil. Despite lower shipments of palm oil products by 8.3% to 16.1mn tonnes in 2016 (2015: 17.5mn tonnes), export receipts from palm oil were stronger by 5.1% to RM43.4bn versus RM43.1bn previously. Exports of total palm oil and palm oil products were also higher by 7.3% to RM64.6bn last year. This include palm kernel oil, palm kernel cake, oleochemicals, biodiesel and others.
Impact on agriculture sector and GDP: As palm oil contributes about 40% to the agriculture sector, a decline in palm oil production will affect the overall performance of the sector significantly. Agriculture sector posted a contraction in all four quarters in 2016, with the highest decline of -7.9% YoY in the second quarter dragged down by more than 19% drop in palm oil production. However, the pace of contraction has been lessening at -2.4% YoY in 4Q16 supported by an improvement in crude palm oil yields as the negative impact of El Niño gradually waned. Of significance, in December 2016, fresh fruit bunch (FFB) yields recorded its first positive growth in 2016, growing by 1.5% compared to the same period last year.
La Niña to boost 2017 Palm Oil Sector
With the El Niño phenomenon has started to dissipate, we are bracing for the La Niña for an opposite effect. The La Niña, characterised with cold weather and associated with more rainfall, is expected to be beneficial for crops and will increase yields on the agriculture sector including palm oil.
This is expected to reverse the tightness in palm oil supply driven by El Nino previously. But, there would be normally six to nine months lagged effect on crop yields after the La Nina first started. Based on the ONI Index, the cool La Niña has started in mid-July 2016.
As such, we would still see the impact of El Niño lingering and predict that the palm oil production to recover only in the second quarter of 2017 onwards. Coupled with the seasonal low cycle, palm oil production is envisaged to still be low in the first quarter. The latest statistics from MPOB for January 2017 still showed weak CPO production of -13.4% MoM to 1.28mn tonnes (the lowest since March 2016) and stockpile dropped to 5-month low and stood at 1.54mn tonnes (-7.6% MoM, -33.3% YoY).
But, since the current La Nina is considered weak, similar to the phenomenon experienced in 2007-2008 and 2010 – 2010, we would only expect a moderate improvement in palm oil production this year.
According to MPOB, Malaysia’s palm oil production is forecast to increase by 12.0% to 19.4mn tonne in 2017 with stockpile to surge to 1.8mn tonnes (+7.8%). Unlike in 1999, where a strong La Nina hit immediately after 1997/98 El Nino, Malaysia’s palm oil production rebounded strongly by 26% YoY.
The expectations of higher palm oil production as mentioned above (as well higher yield for other commodities such as rubber) indicate potential for a higher agriculture GDP growth of 2.0% in 2017, reversing a 5.1% contraction in 2016. In terms of exports, higher production and persistent CPO prices are expected to push palm oil exports higher by 11.2% to 17.9mn tonnes, contributing to higher total export revenue of RM73.2bn (+13.3%) for 2017.
We forecast the CPO price to stay strong in the first half of the year (YTD17: RM3,192 per tonne) due to low palm oil production before tapering off in 2H17 following recovery in output and Ringgit. But, continuous weak demand from China and India may cap CPO price movement. Hence, we expect the average CPO price of RM2,700 per tonne for 2017 – barely unchanged from RM2,648 level in 2016.