Malaysia has ways to reduce high stockpile of palm oil

AT a recent Globoil Conference in Mumbai, renowned palm oil expert Dorab Mistry highlighted an interesting point that a further drop in palm oil prices may help to cool off the high world food prices.

A decline in palm oil prices may cap global food costs as monitored by the United Nations that have climbed 26% in the past year and ease pressure on central banks to raise interest rates.

Palm oil has evolved into a versatile raw material for the production of various food and non-food products. It is used in biscuits, noodles, chocolates, potato chips, cosmetics, toothpaste, detergents and the latest, biodiesel.

It is believed that more than 50% of all packaged goods sold in grocery stores, supermarkets and hypermarkets worldwide contain palm oil.

While palm oil should not be blamed entirely for the rising cost of food, global food prices hit a record high early this year as the price of palm cooking oil increased alongside rice and other food products, said the UN Food and Agriculture Organisation.

However, the situation has changed drastically given the higher-than-expected crude palm oil (CPO) production in Malaysia and Indonesia over the past three months and weak demand that was dampened by the gloomy global economic conditions.

The CPO price has dropped by over 20% this year. CPO futures closed at their lowest in almost a year at RM2,905 per tonne on Monday.

Given such a scenario, Mistry has projected CPO would trade as low as RM2,800 per tonne within the next eight weeks while another expert, LMC International chairman Dr James Fry, has forecast CPO to plunge to RM2,525 by next March if Brent crude oil extends its decline to US$87 a barrel.

So what is in store for Malaysia as a major exporter of palm oil and palm products if the CPO price tumbles before the end of the year? For one, the country's export earnings from palm oil and palm products for 2011 may not exceed the target of RM65bil. A more realistic figure could be closer to last year's RM62.8bil.

For pure plantation players, lower CPO prices will result in more cost-cutting measures, including reducing fertiliser uptake which represents about 30% of total cost.

Should the CPO price remain at RM2,500 per tonne, planters in Peninsular Malaysia can still maintain good profit margins as their average cost of production (COP) is RM1,100 to RM1,200 per tonne of CPO.

Planters in Sarawak, however, will be in a dire situation as their COP is above RM2,000 per tonne of CPO. Those in the palm oil refining business may be happy that their raw material is cheaper now but many will find it difficult to export their products, given the slower demand and stiff competition from Indonesian refiners.

One consolation, however, is Malaysia's B5 biodiesel programme (blending 5% palm methyl ester with 95% fossil fuel) which began in July. Some 500,000 tonnes of CPO are envisaged to be used in the programme. This will help reduce the high stockpile thus restoring local CPO prices to a stable level.