Palm Oil Sector Has Structural Issues To Contend With

Global CPO ASP was at a record high MYR5,088/t, +15% YoY in 2022 where it more than compensated for the industry’s low productivity as Malaysia’s palm oil export revenue grew 24% to RM135 billion.

The country’s oil palm sector is saddled with a few ongoing structural issues such as a declining yield trend, declining planted area, and losing price competitiveness vis-à-vis Indonesia due to the latter’s export tax structure.

In 2022, Malaysia’s CPO yield contracted 1% YoY to 3.05t/ha while FFB yield was a tad higher at 15.49t/ha (+0.1% YoY) – CPO yield was the lowest in 24 years, likely due to severe labour shortage and ageing tree profile. The last time yield was this low was back in 1998 due to the severe drought unleashed by the super El Nino of 1997-98.

Overall, 2022’s CPO output was slightly higher at 18.45mt (+1.9% YoY) as output and yields picked up towards end-2022 owing to a gradual return of foreign workers.

Structural issues that need to be addressed
While worker shortage is expected to normalize by 2Q23, our oil palm sector has other structural issues to contend with: (1) declining planted area, (2) lack of price competitiveness vis-à-vis ID, and (3) declining yield. On point (1), MY’s oil palm planted area has fallen by another 0.063m ha in 2022 to 5.67m ha, its 3rd consecutive year of decline. Pen. Malaysia (-0.063m ha) and Sabah (-0.016m ha) led the fall while Sarawak bucked the trend with a small expansion (+0.016m ha). Cumulatively, MY lost 0.225m ha in planted area between 2020 and 2022. Research house Maybank IB offers a few possible explanations: (i) conversion of land to other agricultural crops in part due to oil palm diseases, lack of workers, lack of interest by the younger generation, ESG considerations, and/or better profitability of other crops, (ii) conversion of strategically located estates for property development and/or infrastructure developments such as solar farms.

On point (2), while MY’s domestic CPO ASP averaged MYR5,088/t in 2022, ID’s domestic CPO ASP merely averaged IDR12,680/kg or MYR3,753/t largely due to ID’s hefty export taxes (ie export levy plus duty). The lower CPO ASP in
ID meant lower feedstock costs for downstream players in ID, which in turn boosted the margins of downstream players there. ID’s hefty export taxes is disruptive and will continue to hurt MY’s PO price competitiveness.

In fact, MY’s RBD PO (MYR4,974/t) and RDB Palm Olein (MYR5,006/t) prices (ie. PO’s derivative products) had averaged below CPO feedstock price. MY’s refinery utilization rate at 57.8% was naturally low in 2022.

MPOB projects CPO ASP of MYR4,000-4,200/t in 2023
At a recent outlook seminar, MPOB projected a CPO ASP of MYR4,000-4,200/t in 2023 premised on: (a) labour availability still being an issue, (b) ID’s production (recovery) being questionable (MIBG’s comments: likely due to lack of fertilizer application over the last few years and ageing tree profile), (c) ID’s higher biodiesel mandate to B35 (from B30), (d) concern over soybean supply risks in South America, (e) lower sunflower seed production from Ukraine, (f) higher demand from China re-opening, and (g) tightened export policy by ID. MPOB expects MY’s CPO output to recover to 19mt (+3% YoY), and end-2023 stockpile at 2.0m tonnes (-9% YoY).

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