Kuala Lumpur, 31 December, 2001 (Business Times) - THE year has indeedbeen good and momentous for Malaysia’s palm oil sector albeit with a fewhiccups here and there, but overall it has been fruitful with the stageand fundamentals all set in place for a promising year ahead.The palm oil industry has proven to be resilient in the face of so manyunpredictable scenarios and obstacles in 2001 but towards the end of theyear it has somewhat changed for the better.Crude palm oil (CPO) prices for the first half of the year were batteredincessantly and was quoted at a ten-year low at RM696 per tonne inFebruary.In the early part of this year and most of last year, palm oil pricescontinued to be battered in the face of intense competition from the world’s 16 other vegetable edible oils.Soyabean, rapeseed, sunflower and sesame oils to name a few, continue toharangue palm oil in the world’s edible oil market contributing to its lowdemand and depressed prices.To make matters more complicated, forecasting CPO prices in the openmarket is akin to a rollercoaster ride and no one can be accurate aboutit.With such a scenario, the livelihood of 420,193 smallholders nationwidewas affected which saw them earning meagre income of between RM150 andRM250 a month.Realising this, the Government put on its thinking cap and shifted to highgear in finding solutions on how to help alleviate the hardships of thesmallholders and the industry as a whole.Together with all the other relevant government ministries and agencies,it did all it can with the Primary Industries Ministry at the helm andcaptained by its minister Datuk Seri Dr Lim Keng Yaik.To name a few, they include the Malaysian Palm Oil Board (MPOB), theMalaysian Palm Oil Promotion Council (MPOPC), Tenaga Nasional Bhd, FederalLand Development Authority, Rural Development Ministry, Rubber IndustrySmallholders Development Authority and the private sector.The sector has also received first-hand attention from Deputy PrimeMinister Datuk Seri Abdullah Ahmad Badawi who chairs a Cabinetsub-committee on “Raising the Income of the Smallholders”.To further attest to the Government’s commitment in alleviating thehardships of the sector it embarked on several initiatives to uplift thealready sagging industry.In March, Dr Lim mooted an idea inconceivable to a few — burn CPO in powergenerators and industrial burners to generate power.The idea will help to off-take production figures which is expected tobreach the 11.5 million-tonne mark by year-end compared with 10.6 milliontonnes last year.Under the plan, some 500,000 tonnes or 5 per cent of annual productioncould to be removed from the market.Tentatively, between 20,000 tonnes and 30,000 tonnes of CPO were to beburned at Tenaga’s power generators.It was a noble idea while it lasted but to date nobody is really sure whathas happened to the initiative since prices were at the RM700 a tonnelevel then compared to the RM1,100 to RM1,200 tonne level currently.It is understood that to date, less than 10,000 tonnes have been burned.Understandably, the industry did not foresee that almost 90 per cent ofTenaga’s power plants are gas-fired and not fuel-fired.For palm oil to be burned, it must first be blended with a diesel variant,medium fuel oil, before it can be burned in the generators.Malaysia’s palm oil industry regulator, the MPOB has also been known toundertake research and development works on biofuel over the past decade.Industry observers questioned what happens when prices of CPO become veryattractive? Do we simply burn it away?But Dr Lim has always maintained the Government’s commitment that theinitiative will not stop and is still on the agenda.Malaysian Palm Oil Association (MPOA) chief executive M. R. Chandran hadsaid in October the initiative has been put on hold except on a researchand development basis.The MPOA groups 96 plantation companies in Malaysia and is seen as adominant force in the industry with a total landbank of over 1.6 millionha.The Government had also in March introduced the replanting scheme, again abrainchild of Dr Lim, for smallholders to replant their ageing oil palmand rubber trees.With a fund of RM200 million allocated by the Government, RM1,000 will bepaid out for every ha of oil palm trees replanted and RM1,100 for rubber.The idea was aimed at removing 600,000 tonnes of CPO from the market byend 2002 with the replanting of 200,000 ha.But the scheme had received lukewarm response when prices improved in thesecond half of 2001 with farmers reluctant to cut trees when the priceswere attractive.Dr Lim said as in October, the replanting scheme which ends in December31, has only seen the replanting of a mere 136ha compared with a total of185,000ha which the MPOB has received in replanting registrations andapplications.Despite the various government efforts, no change or improvement could beseen over the horizon.Prices of CPO continued to be battered for most of 2000 and the first halfof this year, trading well below the RM1,000 a tonne level.CPO averaged at an all-time high of RM2,377 in 1998 to RM1,449.50 in 1999and RM996.50 for the whole of 2000.In July last year, CPO prices averaged RM1,016 per tonne before trading atRM695 a tonne in February, its lowest in a decade.After going through depressed prices for almost the good first half of2001, the sector looked set to be further dragged into the doldrums whensuddenly things changed for the better in the second half of the year.Just when everybody thought such a scenario would continue, CPO pricessuddenly surged 143 per cent across the board at the Malaysian DerivativesExchange to breach RM1,000 on July 12 for the first time in 13 months.It was attributed mainly to a drop in production by 3 per cent to 897,063tonnes in July from 924,855 tonnes in June.That was the catalyst that turned the sector around, and prices have neverlooked back since.Few saw it coming and since then, prices began to firm up to increase atRM987.50 a tonne end-July and went to a high of RM1,215 a tonne in August.Although it dipped slightly in September due to the attacks on the US toRM999 a tonne, it has since began its steady climb to increase 21.5 percent to close between RM1,100 and RM1,200 a tonne last week.Since then, most plantation companies on the Kuala Lumpur Stock Exchange(KLSE) have recorded improved earnings in the third quarter of 2001primarily due mainly to the strong performance of CPO prices.The big boys of the industry such as Sime Darby Bhd, IOI Plantations Bhd,Kuala Lumpur Kepong Bhd and Golden Hope Plantations Bhd, can now breathe asigh of relief after being squeezed by low prices for a larger part of theyear.Most industry observers are in consensus that prices will never touch 1997’s RM2,000 a tonne level again.Chandran, however, said that as long as CPO prices stay above the RM1,000a tonne mark, companies will be happy.“A price of RM1,000 is good enough because it is higher than the cost ofproduction for plantation companies which vary from RM600 a tonne to RM800a tonne.”Most are optimistic that for the larger part of 2002, palm oil prices willaverage RM1,200 a tonne or at least for the first quarter of 2002.Meanwhile, a CIMB plantation analyst concurred saying that the currentrainy season also augurs well for the sector.“The wet spell which is yet to be over will prevent workers fromharvesting oil palm fruits or fresh fruit bunches, which will result in adrop in production and a rise in prices,” said the analyst.To add further to the good news, China formally became the 143rd member ofthe World Trade Organisation last Tuesday, a development that augurs wellfor Malaysia.The republic is set to increase its palm oil import quota to 2.4 milliontonnes from 1.4 million tonnes this year at low tariffs under atariff-rate-quota system.Traders said 70 per cent or 1.68 million tonnes of the 2.4 million tonnesmay well be bought from Malaysia with the balance to be supplied by itsbiggest rival Indonesia.Influential Indian trader Dorab Mistry of Godrej International said duringa recent visit to Kuala Lumpur, palm oil may see a price of RM1,600 pertonne, for at least in the near term.He added that other good news which augurs well for palm oil is theexpected supply crunch of up to 2.5 million tonnes in the production ofrapeseed and sunflower oil, competitors of palm oil.All this is certainly encouraging news for Malaysia. In fact, awareness ofthe nutritional and health aspects of palm oil has grown by leaps andbounds.According to the MPOPC, the marketing and promotional arm of the country’spalm oil sector, palm oil exports in certain countries have jumpedsignificantly.In countries such as Iran, Morocco, the US and the Association ofSouth-East Asian Nations member countries such as Myanmar, Laos, Cambodiaand Vietnam, exports had surged significantly over the past year.Its boss Datuk Haron Siraj said in Iran, for example, from January toAugust this year Malaysia’s palm oil exports increased 2,000 per cent to60,000 tonnes compared with 3,000 tonnes for the corresponding period lastyear.“Likewise, in Vietnam from January to November, the country’s palm oilexports increased 197 per cent to 191,245 tonnes compared with 96,936tonnes,” said Haron.And furthermore, Malaysia is establishing counter-trader arrangements withseveral countries including India, China and the US which will see thepart-payment of construction projects and locomotives in palm oil.Haron, meanwhile, said the country is due for its second round ofreplanting from the current crop which started in the 1960s.Malaysia is the world’s largest producer of palm oil producing 8.32million tonnes in 1996 worth RM9.4 billion.Last year, it produced 10.38 million tonnes worth RM12.47 billion with aplanted area of 3.37 million ha nationwide. Production is expected to hit11.5 million tonnes this year. If prices average RM1,000 a tonne for thewhole of 2002 and exports amount to 10 million tonnes, earnings of RM10billion can be expected from this sector in 2002.