The commodities market in Malaysia has always played a pivotal role in the economic development of the country.
For decades, Malaysia, being a goldmine of natural resources, has successfully leveraged on these natural treasures by turning it into long-term profit making commodities which in turn, pushed the nation to become the developed country we see today.
Minister of Plantation Industries and Commodities (MPIC) Dato Sri Douglas Uggah Embas recently affirmed the sector as one of the nation’s main economic pillars.
“In 2012, the commodity sector and commodity-based products contributed RM127.5 billion to the total national export income or 18.2 per cent to the overall total national export income at RM702.2 billion.”
Despite Malaysia being a major exporter for commodities or commodity-based products, the sector still faces many challenges ahead, as evident by the growing downward trend of total commodities exports.
Statistics by the Department of Statistics Malaysia showed that export earnings from commodities and
products between 2011 and 2012 had decreased by RM13.8 billion from RM141.2 billion to RM127.5 billion.
In January to May 2013, export earnings from commodities and commodity-based products were at RM46.6 billion, which was RM7.03 billion lower compared with RM53.7 billion in January to May 2012.
Commodity prices followed production and trade patterns and were generally lower by early 2013.
Prices of Malaysia’s key agricultural commodities, palm oil and rubber, have been declining steadily since early 2012, and by April 2013, prices of palm oil and rubber were about 21 per cent lower compared with January 2012, World Bank explained in its Malaysia Economic Monitor June 2013 report.
World Bank’s chief economist Kaushik Basu said in a statement that Malaysia has done remarkably well over the last two decades in this context.
“However, the coming onstream of new sources of global energy is likely to put downward pressure on several commodity prices. This will no doubt put restraints on growth on a commodity-exporting country like Malaysia,” he added.
In addition, current on-going global economic turmoil as well as weakening demand from key exports markets such as China and Europe poses as major challenges to commodity prices in Malaysia.
World Bank in its report, explained, “Malaysia’s export growth ground to a halt as commodities joined non-commodity exports in the slowdown. Against a background of declining global trade growth, Malaysia’s exports of goods and services contracted by 0.1 per cent in real terms (an increase of 1.2 per cent in nominal terms) in 2012, a
significant slowdown from a 4.6 per cent expansion in 2011 (an increase of 8.9 per cent in nominal terms).
“Exports remained sluggish in the first quarter of 2013, contracting 0.6 per cent in real terms from the same period in 2012.
“Considering the secular decline in exports of electrical and electronics (E&E) manufactured exports, Malaysia’s export performance was particularly affected by moderating demand from the European Union (EU), China and Japan, Malaysia’s
largest markets for commodity-related exports.
“In the case of China, commodity imports from Malaysia shrunk by 7.7 per cent in the first quarter of 2013 compared to the first quarter of 2012, whereas E&E imports actually increased by seven per cent.
“A similar pattern can be seen with respect to EU imports from Malaysia. As a result, exports of crude palm oil contracted by 11.9 per cent in 2012 and 20.3 per cent in the first quarter of 2013.
“Japanese imports of liquefied natural gas (LNG) in volume terms were flat in the first quarter of 2013 compared to an increase of 11 per cent in 2012, which is linked to the slowdown of Malaysia’s LNG exports from 6.7 per cent in 2012 to 4.5 per cent in the first quarter of 2013.”
Given that Malaysia’s economy has become dependent on commodities, any significant decline in commodity prices could pose immediate risks in terms of deficits in current and fiscal accounts as well as slower economic growth from delays in energy-related investments, the World Bank opined in its economic report.
BizHive Weekly takes a look at key commodities in Malaysia and the impact on the growth earnings of commodities due to weakening demands from key export markets such as China and Europe.
Palm Oil: Push from the programme
Palm oil and palm oil-based products remain as Malaysia’s largest contributor in terms of export earnings.
In 2012, the Department of Statistics Malaysia showed that the palm oil commodities and commodity-based product contributed RM73.262 billion to Malaysia’s earnings exports or about 57.48 per cent of the total exports of Malaysia’ commodities and commodity-based products.
Department of Statistics Malaysia showed that while the production quantity of palm oil had risen in the January to May 2013 period.
Jumpstarting the biodiesel programme
Earlier this year, former Minister of Plantation Industries and Commodities Tan Sri Bernard Dompok launched a B10 biodiesel programme in an attempt to migrate from the existing B5 biodiesel programme.
His predecessor Dato Sri Douglas Uggah Embas resumed the B5 biodiesel programme with the intention to continue the biodiesel rollout progress in the country.
Analysts Alvin Tai and Hoe Lee Leng of RHB Research Institute Sdn Bhd (RHB Research) in a recent report noted that making biodiesel mandatory is crucial in absorbing excess palm oil, especially in the second half of the year. Tai and Hoe outlined that the biodiesel programme had indeed made a positive impact on the sector.
“Malaysia’s crude palm oil (CPO) production surged by 258,000 tonnes, or 18.2 per cent month-on-month, to 1.675 million tonnes in July, as the seasonal upswing began in earnest. Sabah was the weakest with a 12.8 per cent rise, while West Malaysia and Sarawak’s production rose by 18.3 and 26.8 per cent respectively.
“Despite the strong surge in production, stockpile only rose by one per cent month-on-month to 1.664 million tonnes, due to a sharp increase in local palm oil consumption to a record high of 289,900 tonnes.
“Part of the surge was due to near-record biodiesel exports, but, more importantly, the conversion of crude palm oil (CPO) to biodiesel for local consumption,” the analysts highlighted.
They further opined that the mandatory biodiesel rollout in Johor in July has a lot to do with the rise in local palm oil consumption, and the next rollout for northern states of West Malaysia could potentially be brought forward from the October target.
Crude oil prices had remained stable, which lends support to the demand of biodiesel, the analysts noted.
“We see possible price strength in fourth quarter of 2013 (4Q13), if Indonesia’s production continues to disappoint and biodiesel demand remains strong,” RHB Research’s analysts said.
CPO exports performance
Tai and Hoe noted that crude palm oil (CPO) export were sluggish, adding that Malaysia’s palm oil export was flat at 1.419 million tonnes, with an increase in shipments to India and China helping to cushion a general slowdown in exports.
Additionally, on the near-term prospects, the analysts believed that besides the peak crop season, the near-term upside to palm oil prices is capped by soybean supply. Note that China’s soybean import continues to rise, indicating an abundance of supply.
“The speculative net long position for soybean is also on a decline, while soybean oil’s spread against palm oil plunged to US$209 per tonne currently from US$282 a month ago.”
Nevertheless, the analysts added on a positive note, crude oil prices remain stable, which lends support to biodiesel demand.
“We see possible price strength in 4Q13, if Indonesia’s production continues to disappoint and biodiesel demand remains strong,” they added.
Meanwhile, the research firm of MIDF Amanah Investment Bank Bhd (MIDF Research) noted in its latest July palm oil report, Malaysia’s palm oil products are set to benefit from the weakening ringgit against the US dollar.
It in fact believed that the depreciation of ringgit against US dollar has arguably encouraged more foreign demand on Malaysian palm products.
“We believe this factor will provide support to the price recovery.”
On the outlook of palm oil, MIDF Research predicted that over the next three months, supply will continue to outpace demand as crude palm oil (CPO) production is entering its peak production cycle. Therefore, we expect CPO price to remain in a consolidation phase.
“However, in a longer-term view, we anticipate price to trend upwards since demand is expected to grow steadily underpinned by lower soybean supplies, reasonable export tax rate, and relatively cheaper palm products due to weakening ringgit against the US dollar.”
Timber: Out of the woods
The timber commodity has long been a key contributor to the economic growth of Malaysia, especially that of Sarawak.
According to a recent research note by RHB Research Institute Sdn Bhd, during January to April, log production in Sarawak, Malaysia’s largest timber contributor, fell 15.7 per cent year-on-year, due to inclement weather (excess rain in certain logging areas).
It noted, although volumes have started picking up in May and June, it is unlikely that 2013 production levels will be able to match that of 2012. Due to this shortage, Malaysian tropical log prices have been rising steadily since April. In second quarter of 2013 (2Q13), prices rose 15 to 26 per cent quarter-on-quarter, implying a 20 to 30 per cent increase on a y-o-y basis.
Out of the woods
In a recent uptake on the timber sector, RHB Research drew a more positive picture on its future growth and opined, “We are now more positive on the prospects of the timber sector as a whole, on the back of a strong recovery in log prices
following log shortages in Malaysia and improving economic activity in Japan, which is resulting in rising plywood imports.
Although plywood prices have not enjoyed a similar re-rating like that of logs as yet, we believe this is on its way – given the general lag of four to six months to pass on higher log costs to plywood customers.”
It further highlighted Japanese plywood import volumes have already started improving, growing 9.1 oer cent y-o-y in January to May, on stronger economic activity in Japan. This translates to a three to five per cent y-o-y and q-o-q improvement in prices since April.”
In a more recent timber research update, RHB Research noted that since April, Malaysian tropical log prices have been rising
steadily due to the shortage of logs in the global market.
“Currently, Malaysian log prices are about US$250 to US$270 per cubic metre, up 20 to30 per cent y-o-y. We expect log prices to hold at current levels for the rest of the year and for 2014.
“This means that average log prices would be about US$230 to US$250 per cubic metre in 2013, rising by eight to nine per cent to US$250 to US$270 per cubic metre in 2014.”
On the other hand, while plywood prices have not moved up as significantly yet, the research firm expects the average plywood prices to rise by three to five per cent in 2013 and by a further four to six per cent in 2014.
Rubber: Resilient commodity
According to recent statistics by the Department of Statistics Malaysia, production of natural rubber (NR) in June 2013 was recorded at 66,566 tonnes, increased by 33.1 per cent (16,550 tonnes) when compared to May 2013. However, year-on-year, production recorded a decrease of 22.5 per cent.
In June 2013, a total of 62,404 tonnes of NR was exported. Exports decreased by 1,033 tonnes (a decrease of 1.6 per cent) from May 2013 but increased by 2,271 tonnes (an increase of 3.8 per cent) from June 2012.
The research arm of Kenanga Investment Bank Bhd (Kenanga Research) nevertheless placed a positive view on the rubber sector. It believed that the average 10 per cent demand per annum for rubber gloves over the next few years is still intact.
In 2012, the total exports of rubber gloves, synthetic rubber (SR) and NR combined rose 14.9 per cent year-on-year (y-o-y) to 40.7 billion pairs and 3.6 per cent to RM9.8 billion in value.
“In 2012, Malaysia exported 18.6 billion pairs of SR gloves or an increase of 26 per cent y-o-y. The overall demand is expected to continue to be led by NR gloves, although SR gloves had consistently been taking up the former’s market share.
“While latex-based gloves or NR gloves are still dominant (as a percentage to the overall exports of rubber gloves) in Malaysia, the trend is moving towards SR gloves.
“This was evident from the lower NR to SR sales value ratio of 61:39 in 2011 to 57:43 in 2012, and the sales volume ratio of 58:42 in 2011 as compared to 54:46 in 2012.”
Looking ahead, the research firm believed that the demand and strong double-digit growth rate of gloves are expected to continue driven by nitrile gloves.
It also expect latex-based gloves to continue to register positive volume sales as well, due to the stable latex price.
Meanwhile, AmResearch Sdn Bhd (AmResearch) noted that rubber glove manufacturers are expected to benefit from the strengthening US currency given that the industry is export-oriented.
“Year to date, the US dollar has appreciated the most against the ringgit (an increase of six per cent) when compared to currencies of other major rubber glove producing countries (Thai baht: two per cent increase and Indonesian rupiah: five per cent increase), ensuring that our exports remain competitive,” it highlighted.
In the near term, greater demand from China driven by the re-emergence of the H7N9 virus is likely to push Malaysia’s rubber gloves exports, AmResearch opined.
The research firm further reckon that the greatest beneficiaries to the re-emergence of this virus would be the latex glove manufacturers due to immediate uptrading activities.
Pepper:Small and steady
Albeit being one of Malaysia’s smaller contributing export commodities, pepper continued to show steady growth.
Export earnings of pepper products in 2012 versus 2011, grew in line with the total quantity of pepper exported, indicating that pepper prices were mainly stable throughout the year.
In 2011, total export earnings of pepper were 14,210 tonnes at RM285.28 million and in 2012, total export earnings of pepper were 10,580 tonne at RM244.94 million.
Minister of MPIC Uggah said during the launch of Pepper Day 2013, during the January to April 2013 period, earnings exports of pepper saw an increase of 5.7 per cent to RM74 million compared with RM70 million in the same period in 2011. He attributed this to the stablisation of global pepper prices.
The minister noted that the global production of pepper in 2013 is expected to reach 314,500 tonnes while its consumption is expected to increase to 358,000 tonne. According to an analysis by the International Pepper Community, global supply of pepper has is currently having a deficit of 43,500 tonnes. As such, the global price of pepper is expected to remain stable, in the long term.
Cocoa: Hit by volatile global commodities prices
In 2012, the Department of Statistics Malaysia showed that cocoa exports earnings saw a sharp drop at RM3.7 billion compared with RM4.2 billion in the previous year.
The decline in total earnings exports of cocoa from Malaysia was mainly attributable to lower selling prices of cocoa (especially for cocoa powder) amid slower demand and overcapacity (particularly in Europe).
Guan Chong Bhd (Guan Chong), one of the largest cocoa processors in the world, said in the statement that its cocoa earnings growth were mainly impacted by continued weak consumer sentiments in traditional chocolate-consuming markets, such as the eurozone, which is currently still in the midst of recovery.
The prolonged economic uncertainty in Europe has resulted in excess capacity amongst cocoa grinders in the continent, which further eroded profit margins of cocoa processing, the company added.
What’s in store for commodities ahead?
While the plantations and commodities sector face various challenges, it has been viewed that the sector would be able to withstand these challenges and resume its position as one of the key economic drivers to Malaysia’s growth.
“The sustainability of Malaysia’s favourable near-term outlook into 2015 and beyond hinges on the implementation of structural reforms. Malaysia’s recent economic performance and near term outlook owes much to commodity sectors.
“A significant portion of investments has been directly in the oil and gas sector; the expansion in public consumption and capital formation has been financed to a significant degree by commodity revenues (present and future); and investments in real estate are, to some extent, also linked to the recycling of commodity flows,” World Bank said in its recent economic report on Malaysia.
As such, the government of Malaysia has launched various efforts to ensure that the commodity sector remains sustainable.
Earlier this year, former MPIC minister Tan Sri Benard Dompok launched the National Commodity Industry Policy 2011-2020 to provide a framework and long-term strategy to raise the competitiveness and sustainability of the country’s key commodities such as palm oil, rubber, timber, cocoa, and pepper.
Dompok was also quoted by a media as saying that the implementation of the national policy is expected to rise the value of commodity-based exports to RM242.6 billion by 2020 with an annual growth rate of 7.9 per cent.
Nevertheless, the World Bank cautioned that Malaysia should not strictly rely on the commodities sector as it brings risks related to possible shocks to commodity prices and, conversely, higher commodity prices may lead to ‘Dutch disease’ and a loss of competitiveness in tradable manufacturing and services sectors.
“To reach its goal of becoming a high-income nation, Malaysia will need to continue managing natural resources sustainably,” World Bank senior economist for Malaysia, Frederico Gil Sander said in a statement.
He added, “Some adjustments are needed to spend less of the resource revenues on consumption and more on building skills and institutions that will further support diversification.”
In addition, the international financial institutions said, to mitigate risks related to possible shocks to commodity prices, Malaysia needs to accelerate the implementation of productivity-enhancing reforms to boost capabilities and competition, and thus raise productivity of non-commodity sectors.