Is the worst over?

It has been a tough year for plantation companies, with higher-than-expected global palm oil stocks, softening demand and lacklustre CPO prices. What’s in store in 2016?

TAN SRI DR YUSOF BASIRON
CEO, Malaysian Palm Oil Council

RIGHT now, palm oil industry observers are keeping a close watch on how Indonesia will utilise its palm oil funds to subsidise the country’s palm biodiesel mandate programmes and also, the strengthening El Nino  factor. These developments have been highlighted by (international palm oil expert) Dr James Fry at a recent conference in Mumbai as well as at the MPOC seminar in Los Angeles. He used this model to forecast CPO  to trade at US$700 per tonne going into the first quarter next year.

This is fairly agreeable as the fluctuation in palm oil price has been a normal market phenomenon. The situation now as pointed out by another expert, Thomas Mielke, is that there was a big production increase of almost 10 million tonnes in 2014, which is unprecedented, but will not be repeated in 2015 and 2016.

I think there will be a reversal in the CPO price trend, so obviously the worst is over. When I started in 1979, Malaysia then produced 2.5 million tonnes of CPO while Indonesia only half a million tonnes. In the 1990s, we were looking at how are we were going to market six million tonnes of CPO which was a big task. But what we did was invest in R&D and promotions, so we went from three million tonnes in 1980 to 20 million tonnes by 2015 within a span of 35 years – in addition to 40 million tonnes from Indonesia and others. All these quantities have been successfully marketed. So I don’t see this industry losing. Going forward it is even more promising, because the world population is expanding to nine billion and there will be more new R&D findings including DNA research on palm oil.

DATUK CARL BEK-NIELSEN
Vice chairman and chief  executive director United Plantations Bhd

IS the worst over? This is a long-term industry so we should not make knee-jerk reactions when the price starts to go down or move up. Planters have to sustain their economic viability and do their best to keep their nostrils above the water line when prices are low. Also, don’t get complacent when the prices are high.

In my opinion, the next 12-18 months price developments will depend on what the Indonesian government does with its biodiesel policy and of course the weather. This has been and will always continue to be the most important parameter to the price complex.

Industry observers wants to see how Indonesia is going to implement its bio-diesel mandate and whether the Indonesians will use the accumulated funds totalling around US$900mil (from the export duty on CPO) to push through their biodiesel policy. If they do, consumption of palm oil in Indonesia will jump up, helping to bring down stocks. This will have a big impact on palm oil inventory and could have a positive impact on prices. But whether Indonesia will actually pull the trigger and do something about it, well only time will tell.

Secondly, we must not underestimate the negative effect of El Nino on palm yields, the effects of which will kick in in the next three to six months.

From an operational point of view, I feel that the biggest challenges today are related to the acute shortage of labour. If you ask nine out of 10 plantation managers in Malaysia today what their three biggest problems are, they will unilaterally answer: Labour, labour and labour. This will only intensify going forward and whilst we growers try our best day in and day out to increase productivity through mechanisation, it is simply naive to think that the plantation sector will be totally independent of labour.

For temperate crops like soybean or rape, one worker can tend to 150-200 hectares. However, this is mission impossible for our industry as the oil palm is architecturally not inclined for the sort of mechanisation which the temperate agricultural crops enjoy today. We will be lucky if we can move up from the cur-rent one employee to 8.5ha today to one employee to 12-14ha in years to come. However we must make a concerted effort to pursue all cost rational avenues and support the Government in this drive, nevertheless not losing focus so we end up paddling over a river to fetch a pale of water – so to say.

Furthermore, oil palm players need to be on the look out for disruptive changes outside Malaysia. For example, Unilever recently signed a contract to buy algae-based oil which is a non-plant based oil. Today this may be just a blip on the radar, but can this turn into an iceberg? We must watch this carefully. But for now, let us focus on our core business and further increase yields while keeping our costs at bay.

Indeed, Malaysian average palm oil yields have stagnated over the last 25 years and this is a huge problem, not to mention a threat to the economic viability of our industry going forward. Whilst a lot has been mentioned on planting materials, the fact remains that today’s planting materials are capable of giving yields of 30 to 35 tonnes per hectare or 50% -75% higher yields than the industry average.

I think that the problem is not so much the planting materials but more that far too little time is spent by top management walking the fields today. I would go as far to say that the footprints of top management in many plantation-based companies almost belong to the dinosaur age or said differently, they are becoming extinct. Unless you adopt a hands-on management, how are you going to motivate your managers, staff and general employees, how are you going to lead by example and how are you going to show a genuine interest for the work they have performed? They, like you and me, are looking for some feedback, for some recognition of their efforts. Only then can one expect to see golden results, but you simply have to provide the impetus.

For CPO, I think the price outlook will be between RM2,300 and RM2,500 per tonne next year.

PETER BENJAMIN
CEO, United Malacca Bhd

PLANTERS have gone through the best and the worst. In fact, we all have seen the worst many years ago. When I first started my career, I recall reading in the newspapers about oil plantation dubbed as a sunset industry, but we have managed to strive through difficult times and today it’s the golden crop.

The challenges in the palm oil industry are numerous. Malaysia depends a lot on foreign labour. Indonesian workers are good in plantations, but it is getting difficult to bring them here. Indonesia is developing fast (in oil palm) and also, facing shortage of plantation workers. The minimum wage in Indonesia is also increasing and would soon catch up with minimum wages in Malaysia. While the Malaysian Palm Oil Board and the industry have done a lot in terms of mechanisation for harvesting and other R&D initiatives, labour is a major concern and we still need to improve on these areas to counter the shortage of foreign labour.

Weather is also another challenge but this is beyond the planters’ control. The current severe weather in the coming months is going to affect FFB production.

So, I would say that while CPO price may go up in 2016, production may come down.

CHOW KOK CHOY
COO,  Boustead Plantations Bhd

BACK in the 1980s, CPO used to fetch around RM400 per tonne and some even said that it could not go over the RM600 per tonne level. Now, CPO is trading above RM2,000 per tonne, but industry players are still questioning whether the worst is over. I think CPO price has bottomed at RM1,847 in August this year. There is still a little bit of margin, but going forward, plantation players should continue to perform well.

Labour shortage is the number one problem for the labour-intensive plantation sector. I don’t think it can be easily resolved. The local plantation sector is still short of about 20% on labour. Hopefully, we can address this shortage by sourcing from Bangladesh.

Another challenge is to address the stagnating productivity of existing plantations, and the need for more R&D to focus on this problem. At the recent PIPOC conference in KL, the two megatrends highlighted were on genomics and precision agriculture.

As for CPO prices, while industry experts expect RM2,500 per tonne, I’m gauging at RM2,300-RM2,600 per tonne levels. I think the current CPO price should maintain at RM2,200 per tonne till the next quarter.

CPO price could also easily move up to RM2,500 per tonne should palm oil stocks continue to drop and yields decline from the negative effects of the haze and El Nino.

Source : The Star

 (The Star Roundtable on Palm Oil 2015)