13/07/2011 (Bernama) - The palm oil industry is playing an increasingly important role in Malaysia's economy, but lingering concerns over sustainable production and labour shortages could hamper growth, the Oxford Business Group (OBG) says.

In its Economic Updates today, the OBG said that with a bumper harvest expected domestically and better than average yields forecast for world number one Indonesia, overall earnings could be flat in 2011.

Current estimates put the palm oil industry's contribution to the Malaysian economy at around eight per cent of GDP with total output coming in at just over 17 million tonnes, second only to Indonesia.

The OBG also said that the Malaysian Palm Oil Council had projected output to be some 17.6 million tonnes, just shy of the 2009 record of 17.7 million.

"Most of this production is destined for the export market with 16.7 million tonnes shipped to overseas buyers in 2010," it said.

However, it said, market expectations of higher production in the second half of this year were pushing prices down with advance tariffs for delivery in August easing back in late June to levels not seen since 2010.

Meanwhile, rising costs and potential labour shortages were also expected to weigh in on earnings this year.

"With Indonesia's economy booming and wages on the rise, Malaysia is struggling to attract new expatriate workers and retain those already active in the sector.

"While producers can counter this by increasing wages, this measure will come either at the expense of higher prices on the open market or lower profits and less funding for future investments," the OBG said.

On palm oil labelling, it said Malaysia would be hoping that supporters of the proposed Australian legislation fail to muster the numbers to ratify it into law, that the achievements of recent years in promoting sustainable development are taken into account and that other countries do not consider following Australia's lead.

"Even despite the labelling issue, the rising demand for palm oil globally should ease any inconvenience and sales loss from a single market.

"Both production levels and earnings from Malaysia's palm oil sector look set to increase in the coming years," the OBG said.