KUCHING: A possible hike in foreign worker levy, increasing competition from competing countries as well as a drop in crude palm oil price – these are but just a few of the issues cutting away at palm oil companies entering into 2016.
Palm oil players are facing a whole load of pressure from all sides, leading analysts to wonder how things will bode for industry players this year.
It hasn’t been easy: The issues pervading foreign workers – in terms of paying them as well as their supply – is still unresolved at this point. Even then, players face problems with the price of the commodity, as it is comparatively not competitive against countries like France and Indonesia.
The Palm Oil Refiners Association Of Malaysia (PORAM) said Malaysia should scrap export duty rates for processed palm oil products to help its refining sector, which is losing market share to the world’s biggest palm producer Indonesia.
Malaysia’s exports of refined, bleached, deodorised (RBD) palm kernel oil have fallen 26 per cent in the past four years, D Chandramohan, PORAM chairman said in an interview with Reuters.
“Removing its five per cent export duty to zero duty would improve our export competitiveness,” he said earlier this week. To note, RBD is the only Malaysian processed oil product that still attracts a duty.
Refiners in Malaysia, the world’s second-largest palm oil producer, say Indonesian rivals enjoy a price advantage as the country imposes a higher export levy on crude palm oil (CPO) than on refined palm products. This encourages CPO producers to sell to domestic refiners and keep down their costs.
PORAM called last year for a common crude palm oil export duty plan with Indonesia to help Malaysian refiners boost downstream margins and improve market share.
Palm oil refiners also may face a further hurdle if proposals to impose import taxes on palm oil and its related products are implemented in France and Russia.
France’s proposals would see an import tax on palm oil and palm kernel oil of 300 euros (US$326) per tonne in 2017, rising to 900 euros per tonne by 2020. Russia’s excise tax on palm oil could be introduced on July 1 and amount to around US$200 per tonne.
Analysts said this would make palm oil appear less competitive compared with other edible oilseeds, particularly soybean – its closest competitor. France and Russia imported around 126,000 and 748,000 tonnes of palm oil respectively, in 2014, accounting for 1.5 per cent of the world’s palm oil output.
Should France’s progressive tax be approved, palm oil exporters would need to fork out 300 euros, 500 euros, 700 euros and 900 euros per tonne for palm oil in 2017, 2018, 2019 and 2020. This is exponentially higher than the current 103 euros per tonne in tax palm oil exporters are paying.
After 2020, the tax would also be raised annually, as per the decision of the French ministry of finance.
Recall that in 2012, a similar bill called the ‘Nutella tax’ had been proposed in France that would have imposed high taxes on palm oil imports. However, the bill was rejected in 2013.
CIMB Research, which is negative on the additional taxes on palm oil, said: “This will make palm oil less competitive against other competing oils.”
Currently, palm oil is trading at a discount of between US$60 and US$139 per tonne against soybean oils.
“If the additional palm oil taxes of US$200 per tonne and 197 euros (US$219 per tonne) are imposed by Russia and France, it will make palm oil less competitive against soybean oils in these countries.
“This could result in lower palm oil prices due to weaker demand,” the research unit said in its latest report.
Although the amount of palm oil that may be at risk of being substituted with other edible oils may not be significant on paper, CIMB Research said it was concerned that the negative sentiment on the image of palm oil could spread to other countries, in particular those within the European Union, which is a big consumer of palm oil.
The EU – including France – imported about 2.43 million tonnes of palm oil from Malaysia last year, according to the latest report from the Malaysian Palm Oil Board.
Eyes on CPO price
RAM Ratings Holdings Bhd (RAM) believed that CPO prices could average between RM2,300 and RM2,500 per metric tonne within the fi rst half of 2016.
RAM is, however, retaining the full year forecast of RM2,200/MT to RM2,400/MT as prices are expected to moderate during the peak production season in the second half.
Our price forecast is based on the expectation that El Nino’s impact on palm oil production will be mild.
As such, a more severe reduction in yields may result in an upside to our forecast.
That said, heightened competition from the ample availability of soy oil (a close substitute of palm oil) as well as slower global economic growth remain key risks to demand for CPO, keeping the commodity’s prices in check.
This comes as Malaysia’s inventory of palm products had eased to 2.3 million MT as at end-January 2016, RAM observed, albeit still about 30 per cent higher y-o-y.
Against a weak January 2015 that had been affected by fl oods, total CPO produced declined following prolonged periods of dry and hazy weather that had dampened oil palm productivity.
Expectations of sluggish production amid a typically slow production season in 1Q and sustained demand could trim Malaysia’s CPO inventory to about two million MT, supporting the commodity’s price.
For the full year 2016, CPO production in Malaysia and Indonesia is expected to stay fl at at about 20 million MT and 33 million MT, respectively, amid concerns over the impact of El Nino weather conditions on palm productivity.
Emerging market growth, mandatory biodiesel blending activities supports demand.
While y-o-y growth in global demand for palm oil and vegetable oil slowed to about one per cent and three per cent respectively, in 2015, the return of biodiesel blending activities anticipated in Indonesia and continued demand from emerging markets growth could boost the consumption of palm product by about six per cent in 2016.
This would be supportive of CPO prices amid an environment of lacklustre supply growth expected in 2016, although a sharper than expected weakening in global economic activity poses downside risks.
Competition from soy oil remains a key risk to CPO demand in 2016.
In addition to low prices, higher production of soybean meal for use in animal feed had also fuelled soy-based product imports into key consuming nations, increasing soy oil’s market share.
This keen competition is expected to keep the price of CPO in check, as further narrowing of soy oil’s price premium dampens demand for CPO.
CPO presently trades at a discount of about US$100 per MT to soybean oil – still within the historical average.
Clearing up the bad rep surrounding sustainability pactices
Another matter heavy on the minds of players is the bad reputation surrounding palm oil as Malaysia continues to highlight the sustainable development of the oil palm industry.
The Minister of Plantation Industries and Commodities, Datuk Amar Douglas Uggah Embas said the two major palm oil producers – Malaysia and Indonesia – will continue to jointly highlight the industry’s sustainable development, contribution to the economy and poverty eradication, as well as nutritional attributes.
The statement was issued after Uggah held a discussion with French Ambassador to Malaysia Christophe Penot over Malaysia’s concerns on the proposed adoption of Amendment 361 to the Law on Biodiversity by the French Senate on Jan 21.
If approved, the amendment would progressively increase domestic tax of palm oil and palm kernel oil to 300 euros/tonne in 2017 and 900 euros/tonne by 2020.
French senate has claimed that the palm oil industry contributes to deforestation and disappearance of the ecosystems, as well as, health effects of palm oil consumption for the amendment.
Uggah said besides subscribing to the industry-led certifi cation under the Roundtable on Sustainable Palm Oil (RSPO), Malaysia also implemented its own Malaysian Sustainable Palm Oil Certifi cation Scheme (MSPO) beginning 2015 to promote the production of sustainable palm oil.
Currently, 25.3 per cent of Malaysia’s oil palm planted area is certifi ed under RSPO while 111,451 hectares have been certifi ed under the MSPO scheme.
Theargumentthattheindustrycontributes to deforestation was unsubstantiated as Malaysia still has 54.6 per cent of land area under forest cover with the palm oil cultivation area occupying only 17.1 per cent of land area.
There is also ample scientifi c evidence attesting that palm oil is suitable for consumption and beneficial to human health, as confi rmed by more than 150 publications by scientists both in Europe and other countries around the world.
“The new tax structure of palm oil in France has negative repercussion on palm oil imports into France and the longterm bilateral trade relations between Malaysia and France.
“In this context, Malaysia wish to recall the statement by the former French prime minister Jean-Marc Ayrault, during his visit to Malaysia in July 2013, on the importance of palm oil to Malaysia, and as part of a mutually respectful France-Malaysia relationship.
“Ayrault committed that France would not introduce measures that would discriminate against palm oil.
This commitment was extremely important and was welcomed by Malaysia,” Uggah added.
Clearing false allegations on palm oil’s health benefi ts The Malaysian Palm Oil Council (MPOC) responds to false allegations about palm oil, and wishes to re-state the recognized, and scientifi cally proven, facts about Malaysian Palm Oil.
MPOC chief executive offi cer Dr Yusof Basiron, in a statement said the campaign against palm oil by Il Fatto Alimentare, AltroConsumo and Coldiretti is based on falsehoods and smears.
“Malaysia is a good friend of Italy, and MPOC asks the Italian Government to publicly reject this malicious and mean-spirited campaign, which is devoid of scientific accuracy.”
The allegation that has been made, that Malaysia is deforesting rainforests and destroying wildlife is manifestly and demonstrably false. The Malaysian Government has committed to protecting at least 50% of land area as forest – a bold and far-sighted environmental commitment that no other country has matched, including Italy.
This commitment by Malaysia has been recognized by the United Nations, and the World Bank, among others.
Malaysia is committed to a balanced policy that allows for both land development for agriculture (such as palm oil) and forest protection. Palm oil covers just 0.3 per cent of the world’s agricultural land, and has the highest yield of any oilseed crop. This incredible productivity of agriculture allows more forest land to be conserved and protected, and allows poor countries to develop.
The CEO of MPOC, Dr Yusof Basiron, issued the following statement on the environmental superiority of palm oil:
“Palm oil is the most land-efficient, most productive oilseed crop in the world. Sunflower oil, colza and soybeans for example, all use substantially more land to produce oil: this is a scientific fact. This fact illustrates that palm oil is the superior oil in relation to land conservation, and is also superior in relation to efficient food production.
“Malaysia’s forest protection regime is one of the best in the world, as recognized at the United Nations’ Earth Summit. The attempts to tell untruths about Malaysia’s environmental record are shameful and dishonourable. This campaign by Coldiretti, and Beppe Grillo, is unscientific and an insult to hundreds of thousands of Malaysian families who cultivate palm oil”.
From the health and nutrotional aspect, palm oil is a natural GMO-free oil, which does not contain dangerous trans fats. Palm oil is a balanced oil, with 50 per cent saturated and 50 per cent unsaturated fatty acids.
This balance provides excellent qualities for baking and food production. Palm oil has also been used as a replacement for dangerous trans fats, helping to reduce their prevalence in Europe. Trans fats increase bad cholesterol (LDL cholesterol) and decrease levels of good cholesterol (HDL cholesterol).
Recent articles promoted by protectionist interests in the Italian media have claimed that palm oil has negative health qualities. Unfortunately, these articles are misleading and misinforming Italian consumers. Palm oil – like all oils – is a healthy component of a balanced diet. Multiple researchers and experts across Europe have confirmed that palm oil is safe and should not be feared.
A recent study from the French Foundation for Food & Health, explained that palm oil is not hazardous, and the amounts consumed in Europe are perfectly normal.
The study also praised palm oil’s role in reducing trans fat consumption in Europe.
Similarly, a study in 2014 from the Mario Negri Institute for Pharmacology in Milan, published in the prestigious American Journal of Clinical Nutrition, authored by Drs Elena Fattore and Roberto Fanelli, confirmed this point. The study found no evidence that palm oil is harmful.
Sheen seen as CPOPC secretariat to start operations soon
The secretariat for the Council of Oil Palm Producing Countries (CPOPC) based in Jakarta, Indonesia, is expected to start operations sometime this month.
Deputy Minister in the Prime Minister’s Department Datuk Razali Ibrahim said the agreement on this was reached between Malaysia and Indonesia at the CPOPC meeting in Jakarta on February 7.
“Two Malaysians will be named as head of the smallholders and stock manager divisions,” he told Bernama on February 7. Two Indonesians will in turn manage the green economy zone and standards divisions respectively, he added.
With the establishment of the CPOPC secretariat, more oil palm producing countries would be encouraged to participate in the grouping.
“It will help develop and strengthen cooperation within the oil palm industry of the member countries,” he added.
At the Jakarta meeting, Malaysia and Indonesia also discussed the issue of France imposing an unreasonable tax on palm oil-based products in stages.
“Malaysia and Indonesia will object to this. The matter will also be brought to the attention of the Cabinets of both countries first,” Razali said.
Meanwhile, Razali said that the impact or benefit from implementation of the Trans Pacific Partnership Agreement on the oil palm industry could be determined as yet.
“We need to study how the trade pact can benefit the country’s oil palm industry as a whole with two years to go before its full implementation,” he added.
Increasing costs for plantation workers: Drastic jump in foreign worker levy, along with coming hike in minimum wages, could spell higher costs
Perhaps the biggest threat to the palm oil sector is the possible hike in foreign worker levy.
On January 31, the government announced a hike in foreign worker levy ranging from 100 per cent to 300 per cent.
The government’s decision to restructure the levy rate system for foreign workers is expected to bring in an extra income of RM2.5 billion to the country, according to Datuk Seri Dr Ahmad Zahid Hamidi.
Previously, foreign workers were charged different rates based on the sectors where they worked such as manufacturing, construction, service, plantation and agriculture.
Now there are only two categories: The fi rst is for those in the manufacturing, construction and service sector.
Here, each worker will be charged the new rate of RM2,500.
For those in plantation and agriculture, which come under the second category, the rate is RM1,500 per worker.
Domestic workers are exempted from this move.
According to statistics, there were now some 2.135 million registered foreign workers in the country.
Following backlash from companies, organisations and associations, the hike has been temporarily postponed as of February 12.
The research team behind Public Investment Bank Bhd (Public Invest Research) from which will see a staggering increase of 265 per cent for the plantation sector.
“It also works out to some 13 per cent increase of current minimum wage.
On the operating production cost, we expect an increase of four to six per cent for the majority of Malaysian plantation players,” she said in a report on the topic.
This is estimated to increase the cost of production for palm oil players by about RM50 per MT, which comes to between four to six per cent.
“As labour cost makes up about 30 per cent of the plantation’s production cost, we estimate that the foreign labour levy hike is likely to increase the Malaysian plantation average production cost by about RM1,450 to RM1,500 per MT.
Plantation magnates such as Felda Global Ventures Holdings Bhd (FGV) hoped the government will reconsider its decision to increase the levy for foreign workers in the plantation sector.
FGV Group president/chief executive offi cer Datuk Mohd Emir Mavani Abdullah said the sudden move would push up FGV’s cost drastically as the palm oil industry was sluggish due to unfavourable prices and a strengthening US dollar against the ringgit.
“The new levy imposed for foreign workers in the plantation sector is a signifi cant jump of 154 per cent from RM590 to RM1,500, an increase of RM910,” he said in a statement.
Players have not dodged a bullet yet, though.
Costs are likely to rise thiscoming July in the form of a comining hike in minimum wages.
Prime Minister Datuk Seri Najib Tun Razak announced in the recalibrated 2016 Budget that minimum wages will increase to RM1,000 per month for Peninsular Malaysia and RM920 per month for Sabah and Sarawak, beginning July 1, 2016.
CIMB Investment Bank Bhd (CIMB Research) regional head of plantations and deputy head of Malaysia research Ivy Ng affi rmed that planters will be concerned about rising costs of production due to the higher minimum wage.
“This coupled, with lower yields due to El Nino, could raise the costs of production per tonne of CPO,” she told BizHive Weekly.
“So the concern is valid.”
A hike in minimum wages will be detrimental to plantation companies, she confirmed, “because labour costs form around 30 to 50 per cent of costs of production.”
“However, a flattish minimum wage coupled with weaker ringgit may make Malaysia a less attractive destination for estates workers from Indonesia,” she warned.
Foreign workers deterred by higher levy?
If it is continued, the increase in foreign workers’ levy will likely deter new foreign workers from coming to Malaysia, says Master Builders Association Malaysia (MBAM).
Deputy president Foo Chek Lee said the increase will not only have an adverse impact on the construction industry but also other downstream sectors, among them transportation, logistics, services and manufacturing, either directly or indirectly.
“We are appealing to the government to put this on hold given the bad current economic environment.
“Instead of expecting an extra income of RM2.5 billion from the new levy, it is better for it (government) to legalise the illegal foreign workers, estimated at four million. The move is expected to bring in about RM5 billion in revenue,” he said.
MBAM vice president, Tan Sri AK Nathan said hiring foreign workers has become a challenge given the lower value of the ringgit and the implementation of goods and services tax.
He added that the government should review and simplify the registration process for foreign workers to Malaysia in order to reduce the number of illegal foreign workers drastically.
“The current application process should be streamlined. We have no choice but to rely on foreign workers because we have to meet the timeline and deliver our projects, or face getting penalised,” he said.
He said the costs now were even higher than hiring local workers, but sadly, many locals refused to work in the dirty and tough job environment.
“Also, they are not committed to the jobs and refuse to work long hours in the construction sector. Eventhough we have offered RM3,000 per month, they will still turn down the job as they prefer to work in air-conditioned room,” he lamented.