Key Pillar for the Malaysian Economy

From cookies, candy, popcorn, shampoos, vitamins to cosmetics; palm oil can
be found in almost every consumable product sold in a super market. The
price of this oil had surged by a whopping 200% in recent years. Crude palm
oil (CPO) prices increased from RM1410 per metric tonne (mt) in early 2006 to
a high of RM4200 a tonne, in early March 2008. Buoyed by high CPO prices,
companies in this industry enjoyed higher margins and bigger profits. Any
rallies in this sector will propel the local stock market and the countrys
economy.

Strength
Malaysia is the second largest palm oil producer, after Indonesia, and the
largest palm oil (and related products) exporter in the world. Last year, total
exports amounted to RM32 billion which is 62% of global palm oil exports.
CPO is currently the most consumed vegetable oil in the world, mainly due to
enormous demand from China. China imported 28% of total palm oil exports
from the country, last year.

As one of the largest palm oil producers, Malaysia influences the global palm
oil market. Analysts around the world closely follow production here and in
Indonesia as this affect CPO prices which, in turn, impacts the edible oil
market.

Here, the palm oil industry is a highly organised sector. In the past 50 years,
government agencies such as the Malaysian Palm Oil Board (MPOB) and
Malaysian Palm Oil Council (MPOC) have taken on various responsibilities to
grow this sector. MPOB is involved in research and development activities
while MPOC takes care of promotional and marketing activities at the national
and international market.

Malaysia also has the largest CPO futures market in the world. Bursa Malaysia
is growing its futures market by trying up with other exchanges such as
Chinas Dalian Commodity Exchange to cross list CPO futures. The countrys
stock exchange is also planning to launch a US dollar-denominated CPO
future to attract more foreign investors to trade this derivative.

Weaknesses
Companies in the palm oil industry are currently incurring higher expenses
with the recent rise in fuel and power tariffs as well as an approximate 80%
year-on-year price increase for fertiliser. As transportation and fertiliser
contribute 10% and 30% to total expenses of a palm oil plantation, a jump of
40% for fuel prices and 80% for fertiliser increases the companys total
production cost by 24%.

Another problem faced by palm oil companies is with its human resources.
This sector is labour intensive and frequently faces shortages with sufficient
workers. A common solution is to import foreign labourers but this frequently
leads to managerial issues that come with employees of a different culture and
background.

Limited suitable land for further expansion is another challenge. Local

plantation companies have to look outside Malaysia to foreign land banks in
countries like Indonesia and Papua New Guinea, to expand.

For many years, the palm oil industry faced militant campaigns carried out by
environment organisations and indigenous groups that link palm oil production
to orange utan extinction, rainforest destruction and unsystematic
development of peat land to the displacement of small communities. In
response, MPOB is encouraging industry players to obtain accreditation to the
Roundtable on Sustainable Palm Oil, a global industrial body that sets
standards for sustainable palm-oil cultivation. This certification allows palm oil
producers to supply to participants of this roundtable; many of which are large
multinational corporations that produce the worlds best-known food brands.