Strengthening CPO prices

Datuk Peter Chin Fah Kui

The Plantation Industries and Commodities Ministry and the Malaysian Palm Oil Board (MPOB) came under heavy criticism lately from planters badly affected by the sharp fall in crude palm oil (CPO) prices. Planters are urging the Government to consider relaxing the payment of MPOB cess, CPO sales taxes and regulating the high fertiliser prices. Minister Datuk Peter Chin Fah Kui talks at length on the latest strategies and measures taken by his ministry.

The crux of the local planters’ problem is the sharp fall in CPO prices amid historically high palm oil inventory at about 2.3 million tonnes. How will the Government address this issue?

At this juncture, the ministry believes that palm oil prices could be strengthened through supply management activities. The immediate measures undertaken to stabilise prices and improve demand for palm oil include the RM200mil oil palm replanting incentive scheme, Malaysia’s biofuel implementation and Malaysia-Indonesia joint-cooperation particularly on the biofuel programmes.

We are also seeking assistance from independent power producers to use CPO as their energy feedstock.

I believe it is incumbent upon the ministry and the Government to make sure strategies that can influence the CPO price are put in place to ensure price will not slide and hit the bottom like in 2001, when it trades at RM800 to RM900 per tonne level.

In 2008, I think Malaysia’s early intervention i.e. announcement on the replanting and implementation of biofuel does help to influence the CPO price.

In the case of biodiesel, despite Malaysia having the capabilities to implement it years ago, we had to re-consider because at that point of time CPO (raw material for biofuel) was too high.

With CPO currently trading RM1,500 to RM1,600 per tonne, the Government will still need to subsidise “a bit” on the biodiesel initiatives which we will tap from the MPOB cess under the palm oil price stabilisation fund.

If the crude oil prices remain at current lows, then we will have to subsidise our biofuel initiative quite a bit. But if crude oil move up to US$65 to US$70 per barrel, then Malaysia will be in a comfortable position with its biofuel drive.

What are the new strategies in the pipeline for 2009?

Our short term strategy going into 2009 is about stabilising the CPO prices, of which we have undertaken via new measures like replanting, biofuel intiatives and the availability of fertiliser at not-too-costly prices.

The longer term strategy (which Malaysia is working closely with Indonesia) will be to ensure that CPO prices de-coupled from crude oil prices. Since the biodiesel hype, CPO has been tied down too much to fossil fuel prices.

The reason is simple. CPO is currently trading at a huge discount of about US$350 per tonne to its rival soybean oil.

The price of soybean is highly inflated by huge subsidies given to the soybean farmers in the US. Malaysia like to see CPO discount narrowing back to US$100 to US$150 per tonne – a more comfortable trading band for us. This will indeed be the long term challenge for the Malaysian oil palm industry.

Do you expect CPO demand to slowdown in 2009 given the current global economic turmoil?

Contrary to what is happening now, many palm oil users are still buying as reflected by our good export figures. The volume is poised to be higher going into 2009 as the cheaper priced CPO at current level is attractive to consumers.

Major consumers like India has started buying again significantly but China still has yet to come into the market in a big way. I’m told those importers who defaulted on their CPO orders recently, have also started buying from other parties at cheaper price.

This is what is happening now in the real consumers’ world market unlike previously, where the commodity market is played up by speculators.

Another major point is that Malaysian oil palm planters were able to counter criticism from the Western non-governmental organisations (NGOs) on climate change, deforestation, greenhouse gas emissions and the loss of biodiversity.

It will be a constant battle for planters to arrest these issues. Local big oil palm planters are aware of the importance in sustainability, whereby many are in the race to attain the Roundtable on Sustainable Palm Oil (RSPO) “green” certifications.

This will ensure speedier and better access to the stringent and environmentally conscious consuming nations like the European Union and the US.

Once the RSPO certifications on the local planters are completed, it will cover about 700,000ha of oil palm planted in Malaysia with a production of three million tonnes of CPO.

I personally believe that Malaysia has developed palm oil into such a sophisticated commodity.

It is so versatile in the usage in food, oleochemicals and the latest, biofuel. I don’t think there will be a substitute commodity as versatile as palm oil for Malaysia for a long time to come.

In your personal opinion, has the CPO price hit the bottom at RM1,400 per tonne recently and has since been traded above RM1,500 per tonne?

I believe that CPO price has hit the bottom. We can safely say that once CPO touched the RM1,400 per tonne, this level can be considered as bottom. Now prices have gone up to over RM1,500, we still have to wait and see whether this price level can sustain.

If the CPO price can stabilise between RM1,500 and RM1,700 per tonne range within the next six months, it will definitely be good news, given the slow recovery rate in the world economy despite various rescue packages put in place by countries worldwide.

Personally, I would like to see CPO price stabilising at RM2,000 to RM2,600 per tonne.

If the prices can move within these range, it will be good enough for local planters and they need not be too greedy to wish for higher prices than that.

In fact, major producers like Malaysia and Indonesia can progress satisfactorily if CPO stabilises above RM2,000 per tonne.

But realistically speaking, the RM2,000 level seems so far fetched now with palm oil prices creeping to stay above RM1,500 as excess inventory continues to dampen market sentiment.

I think over the next six months, CPO prices will be trade at RM1,500 to RM1,600 per tonne. This is taking into account the measures implemented by Malaysia including cutting down oil palm trees which are above 25 years old and implementation of the biofuel programme.

In addition, the global liquidity scenario is expected to improve which will make available more resources for trade financing.

At current spot CPO prices of around RM1,600, Malaysian planters will continue to see good profit estimated at RM1,600 per ha based on production cost RM1,200 per tonne and oil yield at 4 tonnes per hectare.

Stable CPO prices will sustain the rural economy from organised smallholders schemes under Felda, Felcra, Risda and independent smallholders.

Do you expect new form of attacks or allegations from Western NGOs on palm oil will intensify in 2009?

The NGOs will continue to focus their attention on questioning the sustainability of palm oil.

This is despite the fact that Malaysia on numerous occasions had provided numerous occassions had provided clarifications on the sustainability of palm oil produced by Malaysia.

In addition, the RSPO certification is a testimony to Malaysia’s effort to produce sustainable palm oil.

Malaysia and Indonesia will continue to collaborate in hosting joint seminar overseas to address this issue.

The Star