YAB Tun Dr Mahathir : Palm Oil Price Increasingly Tied To Crude Oil, We Need Intensive Value Added

Two anchors of our economy - palm oil and crude oil (gas) are suffering low prices again. 

Brent is selling at US$60 per barrel whereas West Texas is selling at US$51 per barrel.

CPO is at just about RM2000 a tonne, down 38% from RM3200 about a year ago.  

Plantation companies are being badly hit.  Sime Darby Plantations took an 80% hit in its quarterly net profit from RM1b down to RM100m. That is a very big fall.

Moody's Analytics forecasts that our growth will slow over the next two years. It is due to the 

• weak global economy
• weak oil and commodity prices and 
• the Pakatan government tightening spending  

Here is Moody's :

M'sia’s growth slow next 2 years 
weak global economy, weigh on commodity prices
Every region in world slower growth 2019 - 2020

M'sia GDP growth  (forecast):

• 5.9% in 2017
• 4.8% in 2018
• 4.4% in 2019
• 3.6% in 2020

(OSTB : 12 months is foreseeable but anything beyond is anyone's guess.)

lower commodity prices, slower global growth will hurt Malaysia
don’t see acceleration in commodity prices until global economy picks up

CPO prices significant weak since start of year
CPO futures near RM2,000 per tonne
high stock level, weak demand

US fiscal stimulus to end in 2020 
may slow US growth, global commodity market
If no recession in US, Europe global growth could rebound 2021 - 2022

Malaysia clearly on downside
falling oil prices because global demand slowed 
US shale accelerated quickly over past year
OPEC less able to control prices

govt's tight fiscal policy to slow growth next two years 

So the situation indeed looks gloomy.  
But we can overcome this. 
Just have faith in ourselves folks.

Both crude oil (hence natural gas) and palm oil prices are low. 
These are two huge pillars of the Malaysian economy. 

For example palm oil is expected to bring in RM80 billion revenue in 2018.

This is a lot of money.

But there is something new in the equation which ALL Malaysians should be aware, especially our Government. 

For the first time now the price of Crude Palm Oil (and hence the price per acre of plantation land and ultimately the price of development land as well) is now linked to biofuels and hence crude oil prices.  

Biofuel prices are determined by oil prices. 

Oil prices are now strongly influenced NOT by OPEC but by shale oil producers in the US (and yes, also by the world economic sitution).

The New York Times recently wrote an in depth article on palm oil prices which highlights the link with biofuel prices.  You can read it here. 

What happened was that 10 years ago, to reduce reliance on fossil fuels, reduce carbon emissions etc the US government passed legislation to increase the use of biofuels in the manufacture of petrol and diesel.  Biofuels can be made from any vegetable grain, seeds or oil,  like corn, sunflower seeds, palm oil etc.  

Over the past 10 years this American biofuel policy sparked off a huge increase in the planting, growing and harvesting of all sorts of vegetable oil plants and grains. All over the world the acreage for sunflower seeds, corn, oil palm etc has increased tremendously. 

The oil palm industry has especially accelerated in Indonesia. Here is the New York Times:

• "Palm-oil producers had been lobbying American lawmakers to introduce biofuel incentives for years, and they were well prepared for the moment when the incentives became law. Wilmar — the colossal Singaporean conglomerate that controls nearly half of the global palm-oil trade — announced in 2007 that it would quadruple its biodiesel production.  
• In Indonesia, officials directed state-owned and regional banks to make loans on more than $8 billion worth of palm-oil-related development projects and pledged to produce 5.9 billion gallons of biofuel within five years. 
• They also announced that Indonesia would convert more than 13 million acres of additional forest to industrialized palm production."

I believe Wilmar is owned by the Kuok Group. As a result of this American policy the output of palm oil has also surged tremendously. 5.9 billion gallons of biofuel, 13 million acres of additional oil palm plantation etc is a lot of new production.

In 18 years Indonesian production has increased almost EIGHT TIMES from about 5 million tons to over 40 million tons.

Malaysia has doubled from 10 million tons to 20 million tons.

Now look at the price chart for palm oil. This is in US$ so you must TIMES by EIGHT. (Just kidding. Dollar/Ringgit is around RM4.20 now.)

While palm oil production is skyrocketing, the palm oil prices are sky-diving. 
(Plus also prices of all other vegetable oils and fats). 

CPO is around RM2000 per ton.  
Just four years ago it was about RM3600 a ton. 


For the past two to three years we can see that each time the oil prices go past US$60 per barrel, shale oil production ramps up and the oil prices stabilise.  They fall back. 

With increasing efficiencies in shale production the per barrel break even price should fall even further. 

Biofuels are a blend of vegetable and crude oil products. Biodiesel can be 5% vegetable oil based and 95% petroleum based. 

So if crude oil prices drop (because of oversupply or a decrease in demand), biofuel prices also will decrease. 
This will exert downward pressure on whichever vegetable oil (palm oil, sunflower, rape seed, corn oil etc) that is used to blend the biofuel.

I think this is what is happening now.

First of all it is the biofuel craze that has expanded the planted acreage for all vegetable oils all around the world, especially for Indonesian palm oil.  
As a result the production of palm oil is now sky rocketing. 
That by itself will push down palm oil prices. 

The biofuels production (which displace petroleum fuels), high production of shale oil and the weak world economy have all put downward pressure on crude oil prices.   
Who is pointing the bigger gun at whose head - shale versus crude, crude versus biofuels, biofuels versus vegetable oil etc is now closely linked.  

It is just another variable in the equation that Malaysia (earning RM80 billion palm oil revenue this year) has to contend with. 

• Here is the high risk part : All these variables are totally out of our control. 
• We are at the risk of what other seemingly "unrelated" industries will do. 

It takes SEVEN years for oil palms to start fruiting. 
Another seven years for payback of the investment. 

You cannot switch a million acres of oil palm plantation to industrial estates (to create new high tech jobs) in a few weeks or months. These are long gestation investments.

But do not worry or fear.  
I believe the solution lies in the palm oil itself. 
Always work with the assets that you have first.
Always work with what you have.

Right now the bulk of our palm oil is simply sold as crude palm oil or as cooking oil, with very basic processing.

We should change this situation.

There are a million products that are made from palm oil.  Here are some charts :

Here is a list :

• Palm oil used as crude oil and in refined form. 
• One quarter of palm oil and palm kernel oil worldwide used as crude oil. 
• In SE Asia, Africa, Brazil, crude palm oil widely used for domestic cooking.
• 
  
• In Europe and US palm oil mostly used in refined form
• a valuable ingredient providing texture and taste for variety of products
• Refined palm oil ingredient in margarine, confectionery, chocolate, ice cream, bakery products. 
• widely used in non-foods such as soap, candles, cosmetics. 
• 
  
• More than half the products in supermarket are made with palm oil.
• 
  
• many derivatives of palm oil used in wide range of food products, pastry, cakes, margarine, confectionery, cooking oils, emulsifiers, and snack foods. 
• derivatives from palm kernel oil used in cosmetics, confectionery and margarine

That is a huge variety of palm oil based products. 
Very little of this is manufactured in Malaysia. 

• We produce 20 million tons of palm oil a year 
• About one third of world production. 
• This is a huge competitive advantage. 
• We already control the raw material. 

But our value added downstream processing is very small - compared to the market for such products. Palm oil is so diverse. Just like rubber too.

We have to urgently develop our value added downstream processing of palm oil. 

• THIS IS REALLY URGENT. 
• Palm oil prices are not going to jump back.
• Crude oil prices are not going to jump back.
• We have 32 million people and growing.
• The education system is manufacturing duds.
• Religion and arabisation is creating whackos and zombies.

This may mean making available special incentives, tax incentives, joint ventures, wooing foreign players (like Wilmar - they are already Malaysian) to develop value added downstream processing of palm oil.

Otherwise it will forever be : 

'We need Banglas, we need Indons, we need Banglas, we need Indons' to harvest our oil palms.

We may need to change the national anthem to :   

'We need Banglas, we need Indons, we need Banglas we need Indons".

The banner says 'No to Bangla / Pakistani. Jangan rampas kerja / bisnes kami.'

Oil palms used to be such a golden crop. 

It used to be such a low hanging fruit. 

Not anymore.

If we do not go up the value chain it will now start to suck up vast amounts of our resources with lesser and lesser returns.