30 July 2001 (Business Times) - PRIMARY Industries Minister Datuk Seri DrLim Keng Yaik says the long-term outlook of the palm oil industry remainsbright despite the current difficulties it is facing.

"World population growth and improvement in living standards will resultin an increase in demand for oils and fats, for which palm oil is a maincontributor," he told attendees of a seminar on the prospect and outlookfor the palm oil in Malaysia.

Current estimates show that world population would grow to 8.2 billion byyear 2020.

With the improvement in living standards, per capita consumption of oilsand fats, currently at 15kg, is projected to increase to 20.kg in thatyear.

This means that the demand for oils and fats will increase from thecurrent level of around 110 million tonnes to 170 million tones in year2020.

Dr Lim pointed out that palm oil would play a bigger role in meeting thegrowth in world consumption of vegetable oils in view of its readyacceptance by the consumers on account of its quality, versatility andnutritional as well as health attributes.

The minister also referred to interesting developments in the globalmarketplace that would impact positively on the Malaysian palm oilindustry.

To begin with, the much anticipated admission of China into the WorldTrade Organisation (WTO) is likely to take place this year.

With this, Dr Lim expects to see Malaysian palm oil exports improving withthe higher import quota allocation by China.

Another ominous sign of likely export increase to China is the release ofsecond batch of import quota for palm oil on July 12 2001, amounting to700,000 tonnes.

Similarly, India is expected to increase its palm oil uptake in the comingmonths to stock up for the Deepavali festival.

Although these factors will somewhat firm up palm oil prices, Dr Lim saidthere were other factors as well.

He said the palm oil industry served three divergent market needs, namely,the food sector, the industrial sector, and potentially the wood-basedsector, hence demand in these sectors would also ensure the demand forpalm oil for years to come.

The price of palm oil has been declining since 1998.

From a high of RM2,377 per tonne in 1998, its price declined to RM1,449per tonne the same year and further declined to RM996.50 per tonne lastyear.

The price of palm oil for the period of January to June this year averagedRM760 per tonne.

For the period 1999 to 2000 the average of the reduction in prices hasbeen 31.1 per cent.

Despite the lower prices, exports increased by a mere 16 per cent from8.91 million tonnes in 1999 to 9.05 million tonnes in 2000.

As a result of the lower price scenario prevailing in 2000 and despite theincrease in export volume, the export value registered a reduction of 22.7per cent.

To address the problem of declining prices, Dr Lim said the Government,through his ministry has embarked on a three-pronged strategy.

The first step will be to reduce the national crude palm oil (CPO) stockto below one million tonnes.

To achieve this, the ministry has taken the step to aggressively use CPOas fuel oil.

"We have been collaborating with Tenaga Nasional Bhd to burn a blend ofCPO and medium fuel oil (MFO) at the latter's power plant in Praiinitially with the possibility of extending to plants in other locations,"Dr Lim said.

The second strategy the Government has embarked on is to accelerate thepace of replanting especially for palms that exceed 25 years old.

It is estimated that 7.2 per cent of Malaysia's oil palm is above 25years.

Being old, these trees have declining productivity and are costly toharvest.

Replanting with better yielding clones will improve productivity andprovide higher income in the long-run.

If 200,000ha are cut down by the end of the year, then some 600,000 tonnesof CPO production can be withheld.

Another strategy to reduce stock is more long-term in nature via settingup of a palm methyl ester or diesel plant.

This plant incorporates facilities for the extract of carotene and VitaminE.

The Malaysian Palm Oil Board is actively pursuing this project withPetronas and several interested plantation companies.

When operational, the plant will be able to mop up excessive CPO supply inthe market and therefore help maintain stocks at comfortable level andfirm up prices.

Besides the stock and production-reducing measures, the Government is alsointensifying export demand expansion programmes through export creditfacilities, increasing technical support to customers, "locking in" marketfor palm oil via counter trade arrangements and allowing unlimited quantumof CPO to be exported free of duty.

"Efforts at reducing stock and expanding the demand for palm oil haveborne fruit.

Stocks were reduced to 1.03 million tonnes at the end of June comparedwith 1.4 to 1.5 million tonnes at the end of January," Dr Lim said.

The measures taken by the Government resulted in increased palm oilexports for the January to June period this year which amounted to 5.34million tonnes, a whopping 30 per cent increase compared with thecorresponding period last year.

These factors coupled with improved market sentiment, has seen pricesfirming up beginning early this month, reaching above RM900 per tonneduring the second week of July and breaching the RM1000 per tonne on July12 2001.