WORLD PALM OIL SUPPLY, DEMAND, PRICE AND PROSPECTS:

FOCUS ON MALAYSIAN AND INDONESIAN PALM OIL INDUSTRY

By
Ramli Abdullah
Datuk Dr. Mohd Basri Wahid

Malaysian Palm Oil Board

(MPOB)

1
 WORLD PALM OIL SUPPLY, DEMAND, PRICE AND PROSPECTS:

FOCUS ON MALAYSIAN AND INDONESIAN PALM OIL INDUSTRY

Ramli Abdullah1
Datuk Dr. Mohd Basri Wahid1
BACKGROUND

Production and consumption of world’s oils and fats increased at almost the same rates in the
past. Any differences between them will indicate either an oversupply or shortage situations;
oversupply occurred when production exceeded consumption and shortage when otherwise. For
instance,, there was a shortage of oils and fats in 1976 when their production of 45.9 million
tonnes was less than their consumption of about 47.3 million tonnes while they were at
equilibrium in 2009 as they equaled at about 163.9 million tonnes (Oil World, 2010). This
translated to about a 4% annual increase each in production and consumption for the past 32
years.

Among 17 oils and fats, palm oil emerged as the significant player that helps expansion in
world’s production and consumption of oils and fats. From production of only 1.6%
consumption of 6% in1976, palm oil production and consumption had grown to 28% in 2009 to
become the world’s largest produced and consumed oil. It recorded the fastest increase in global
production and consumption due to the significant contributions by Malaysia and Indonesia.
Meanwhile, the increase in its consumption is mainly due to its techno-economic advantages
over other oils and fats, especially its main competitor, soybean oil.

Global oils and fats market has grown accustomed to the ever increasing availability of palm oil
to meet the rising demand for edible oils. Due to the importance of palm oil, this paper attempts
to highlight the world supply of palm oil by focusing on the two main producers, Malaysia and
Indonesia. Its performance and prospects in 2010 will also be included. After dealing with the
supply, this paper will highlight the palm oil consumption globally as well as its prospects in
2010. Finally, the paper discusses about the palm oil price performance and prospects in 2010.

1
Malaysian Palm Oil Board
2
WORLD PRODUCTION OF PALM OIL

Palm oil, in general, is produced from a perennial crop and is the most reliable in supply. This is
due to the fact that the crop when once planted, it will be in production for 25 years or more.
The oil palm fruit produces two distinct oils, which are palm oil, obtained from the mesocarp and
palm kernel oil, obtained from the kernel or endosperm of the oil palm fruit. Due to the long-life
of the trees, the supply of both products can be easily assured. In comparison, productions of oil
from other perennial crops such as coconut and olive, however, have been fluctuating. On the
other hand, productions from annuals are affected by factors such as uncertain weather
conditions, demand, supply and prices of other substitutes. Their planting intentions can be
altered very fast.

Oil palm has the highest average productivity compared to other major crops. It is the most
efficient producer of oil among the oil crops. It is capable of producing 4,080 kg of palm oil and
456 kg of palm kernel oil giving a total of 4,536 kg of palm oil products per year from a hectare
of land (Table 1). It is about 10 times more productive than soybean since only 403.3 kg of
soybean oil can be obtained from a hectare of soybean crop.

The preceding paragraphs explain why world palm oil saw a phenomenal increase in production
in the past. From an average of 1.26 million tonnes during 1958 to 1962 period, its production
surged to about 17.9 million tonnes during the period 1996 to 2000 and then to 45 million tonnes
in 2009. This consequently increased its ranking from the 10 th position to a more comfortable
position, second and then first in the ranking of oils and fats production, as shown in Table 2. It
also outperformed soybean oil production since 2005 (Figure 1). While it witnessed a meteoric
rise in production, some animal fats, such as butter, tallow and lard, observed only a mild
increase in production, thus recording a drop in their rankings. Butter dropped to the 7 th place in
the ranking order while tallow and lard fell to fifth and sixth place respectively (Table 2).

3
 Table 1: Average Productivity of Major Oil Crops
2007/2008 p Oil Oil Equivalent
Oilseeds Conversion Per ha/yr (kg)
Yield Factor (%)
Kg/ha/yr
Soybean 2180 18-19 403
Cottonseed 1300 18-20 247
Groundnut 1060 45-50 504
Sunflower seed 1350 40-50 608
Rapeseed 1840 40-45 782
Sesame seed 460 45-50 219
Palm Oil - 20 4080
Palm Kernel Oil 960 45-50 456
Copra 560 65-68 372
Note: Preliminary (p)
Sources : Oil World Annual 2009
Oil World Monthly May & June, 2008
Fuels and Chemicals from Oilseeds

mil.
tonnes
50

40

30

20

10

0
2004 2005 2006 2007 2008 2009

Source: Palm
Oil World, various issues
Oil Soybean
Figure 1: World Production of Palm Oil and Soybean Oil

4
 Table 2: Average Annual production of Major Oils and Fats
1958 - 1962 1996 - 2000 2009
Rank Mil. Rank Mil. Rank Mil.
Order tonnes Order tonnes Order tonnes
Total 29.16 103.45 163.94
Butter 1 4.21 7 5.75 7 7.12
Tallow 2 3.39 5 7.65 5 8.43
Soyabean 3 3.20 1 22.84 2 35.81
Lard 4 3.19 6 6.21 6 7.77
Groundnut 5 2.65 8 4.62 10 4.12
Cottonseed 6 2.26 9 4.00 8 4.69
Sunflower 7 1.90 4 9.14 4 12.97
Coconut 8 1.85 10 3.10 11 3.22
Olive 9 1.30 11 2.42 12 2.92
Palm 10 1.26 2 17.93 1 45.06
Rapeseed 11 1.13 3 12.56 3 21.34
Linseed 12 0.92 12 0.73 16 0.58
Source: 1958 – 1962 and 1996 – 2000 data is from Gunstone (Inform, 2000), and
2009 data from Oil World

The main contributors of palm oil are Malaysia and Indonesia and their proportions together
constituted about 85% of the world production of palm oil and 23% of the world oils and fats
production. Production from both countries had increased over time; Indonesia increased from
12.38 million tonnes in 2004 to 20.9 million tonnes in 2009, expanding at 11.8% annually while
Malaysia from 13.98 to 17.56 at 6.1% (Figure 2). The faster growth of Indonesia’s land
expansion had allowed the country to overtake Malaysia’s production since 2006 to become the
world’s largest producer of palm oil.

5
 Mil. tonnes
25
20
15
10
5
0
2004 2005 2006 2007 2008 2009

Sources:Malaysia
MPOB and Oil World
Figure 2: Palm Oil Production: Malaysia and Indonesia

a) MALAYSIAN OIL PALM INDUSTRY

i) Oil Palm Areas

Malaysian total planted area under oil palm in 1960 was only 55,000 hectares (ha) (Figure 3).
Since then, it expanded rapidly under the government‘s agricultural diversification programs to
overcome the country’s economic reliance on rubber and tin. Due to that, the area recorded an
increase to 261,000 ha in 1970, then to almost one million ha in 1980, and to 3.38 million ha in
2000. This expansion reflects the annual growth rate of 10.9% from 1960 to 2000. The rapid
expansion was achieved as a result of the successful conversion of existing rubber plantations
into oil palm estates as well as the opening up of new land areas under the government land
schemes. These oil palm plantations are run mainly under the estates management system and
organized small-holders scheme, through which the industry will be able to utilize resources
properly and economically, and to correctly apply advanced management, planting techniques
and high yielding materials. The country was successful in managing the plantations due to its
experience in rubber industry.

6
 5
4.5
4
3.5
3
2.5
Area (Mil.

2
1.5
1
0.5
0
1960 1970 1980 1990 2000 2005 2006 2007 2008 2009
Average Annual Growth Rate (%)* 10.9%
3.4

Note: * - compounded average growth rate

Source: MPOB
Figure 3: Oil Palm Planted Areas in Malaysia

The areas then continued to expand from 3.38 million ha in 2000 to 4.567 million ha in 2009,
giving an annual growth rate of 3.4% (Figure 3). The area appeared to grow at slower annual
growth rates during the millennium compared to the period prior to the millennium. This
indicates that the oil palm industry started to face land constraint in the country presently and it
will be further acute in the future. Oil palm has to compete with other crops for the balance of
agricultural land in the country.

The oil palm areas in Malaysia were owned by four different categories of ownership, namely
smallholders, organized smallholders (FELDA, FELCRA, RISDA), states and private
companies. Among these, the private owners represented the largest proportion and their areas
increased from 2.48 in 2006 to 2.81 million hectares in 2009 (Figure 4). The areas owned by
smallholders also increased from 0.45 to 0.61 million hectares. The areas belonged to organized
smallholders were more or less stagnant during the period.

7
 3

2.5

1.5

Mil. 1

0.5

0
2006 2007 2008 2009

SmallholdersFELDA FELCRA
RISDAStates Private

Figure 4: Oil Palm Planted Areas by Category

ii) Oil Palm Yield

Yields of fresh fruit bunch (FFB), CPO and palm kernel (PK) did not show much improvement
(Figure 5). FFB yield declined from 19.6 in 2006 to 19.2 tonnes per hectare in 2009 and CPO
maintained at 3.93 tonnes per hectare during the two years. The decline in the yields led to the
decline in CPO production. In 2009, CPO production declined to 17.56 million tonnes from
17.73 in the previous year. The year 2009 was a stress year for oil palm after over-produced in
2008.

20

15

2006
Tonnes/

10
2009

0
FFB CPO PK

Figure 5: Oil Palm Yields

8
iii) Malaysian CPO Production

In tandem with the increase in areas, CPO production in Malaysia had increased significantly
from 92,000 tonnes in 1960 to 17.6 million tonnes in 2009 (Figure 6). The production increased
annually in most of the years during the period except in some years in which it dropped due to
the stress of the trees. After the stress, the trees recovered with production usually rebounded.
The annual growth rate of CPO production was high at 16.7% in the 60s and increased at the
highest rate in the 70s at 19.6%. The high rates were mainly due to the trees which were in
majority at the young age with increasing yield. After the 70s, the growth rates started to decline
which means that the area increased at decreasing rate; 9% in the 80s, 5.9% in the 90s and 4.9%
in the millennium.

19.6% 5.9%
16.7% 4.9%
9.0%

Figure 6: Malaysian CPO Production and Its Annual Growth Rates

It is interesting to record here that CPO production exhibited seasonality pattern monthly. The
production pattern was being analysed for the period of 1989 until 2009 which shows a unique
9
pattern which repeats every year (Figure 7). The production will usually decline in February
from January to form the lowest production level of the year with the seasonality of 0.77 (Figure
8). Thereafter, it will uptrend until September which then forms the peak month of the year with
the seasonality index of 1.22. The production will then de-trend until December with the index of
0.94.

2500000

2000000

1500000
Production

1000000

500000
19

19

19

19

19

19

19

19

19

19

19

20

20

20

20

20

20

20

20

20
0 20

PRODN

Figure 7: Monthly CPO Production Cycles in Malaysia

1.40
1.22 1.17
1.20
1.07
1.00
0.93 1.14
1.00 0.84
1.06
0.80 0.99
0.88 0.94
0.77
0.60
Ind

0.40
0.20
0.00

Month
Seasonal Index

Figure 8: Seasonality Index Pattern of Malaysian CPO Production

10
iv) Malaysian Production of Biodioesel

Malaysian oil palm industry has entered a new era investments into production of 54,981 tonnes
of palm methyl ester (PME) in 2006 (Figure 9). It increased further to 130,000 tonnes in 2007,
172,000 tonnes in 2008 and 222,000 tonnes in 2009. The surge in biodiesel production implied
that there is an additional usage of palm oil.

A few relevant factors had led to the development of biodiesel in Malaysia. It started in 2006
when price of crude petroleum was high above USD 60 per barrel. Due to this, many countries,
including Malaysia, started looking for its alternatives such as a renewable energy from
vegetable oils, including palm oil. These countries include Europe, the USA, China, Australia,
Thailand, Philippines, Indonesia, and South Korea. Europe had its biofuels directive established
in which it will enforce 5.75% of biofuels in 2010 which is equivalent to 10.2 million tonnes of
production. This created high demand for PME in the EU market. The USA introduced its
Program 20 in 10 where it will attempt to achieve 20% displacement of petroleum with biofuels
in 10 years (2017). China used non-edible feedstock in the biodiesel production while Australia
used tallow. Thailand has mandated for B2 in diesel pool as of April 2008 and B5 nationwide
beyond 2009 and will move towards B10.

250000

200000

150000 200
Tonn

6
100000 200
7
50000

0
Production Export

Note: 2006 started in August

Figure 9: Production of Palm Methyl Ester (PME) in Malaysia

11
Low price of CPO in 2006 had made the biodiesel industry viable. CPO is the feedstock for this
industry, thus the cheaper the feedstock the more profitable is the biodiesel industry. However,
when the CPO price surged to a higher level, the industry will face various levels of profits.
From August 2006 until June 2007, the price of CPO was low and the biodiesel industry made
high profits. Thereafter, the industry recorded a thin profit margin as the CPO price was at high
level. Presently, the industry experienced a loss in this business.

The consumption of biodiesel in Malaysia is quite minimal. Consequently, majority of the PME
produced was exported. About 48,000 tonnes (87%) were exported from the total production of
55,000 tonnes in 2006 (Figure 10). A lesser percentage of 73% of PME produced in 2007 was
exported while in 2008 and in 2009 the export volumes exceeded the production volume of
PME.

Figure 10 shows the export destinations for Malaysian PME. It is clear from Figure 11 that EU is
the biggest importer of the Malaysian PME. The export volumes from Malaysia surged
significantly for the past four years from 12,500 tonnes in 2006 to 119,000 tonnes to the EU in
2009. China is the smallest importer of Malaysian PME

120000
100000
80000
Tonn

60000
40000
20000
0
Aug- Dec 2007 2008 2009
2006

China Taiwan EUHong Kong SingaporeS. Africa

Indonesia Japan
Australia Puerto RicoIndia S. Korea Kenya USA

Figure 10: Export Destinations of Malaysian PME

12
v) Outlook for Malaysian CPO Production

Malaysian CPO production in 2009 declined to 17.56 million tonnes from 17.73 million tonnes
in 2008. This was due to the stress of the trees after heavy production in the 2008 which
registered a sharp increase of 12.1% from 2007. Now, it is the question of 2010 CPO production
which is expected to face many uncertainties. One of them was the El Nino which was
speculated to happen in Malaysia at the beginning of year and many analysts forecasted varying
figures for CPO production in Malaysia from 17 million tonnes to 18.5 million tonnes.

Will El Nino happen in 2010? It is a fact that oil palm FFB yield can be affected by its
occurrence because of the low rainfall periods, the severity is largely determined by the number
of months with less than 100 mm rainfall. Since 2007, the number of months with less than 100
mm of rainfall has been very low, i.e. less than or equal to one month per year. Therefore, base
on the current monthly weather situation, the reduction in FFB yield from the current El Nino
event is expected to be minimal.

The major effects of drought on oil palm yield are usually observed 10 months and 24 months
later. In this respect, a continuously low rainfall (<100 mm) for more than two months will have
significant effects on the palm yield, as what was experienced in the past severe El Nino events
such as in 1997-98.

Thus, the effect of El Nino is very minimal in 2010 and this makes the outlook for Malaysian
palm oil to be bullish. During January to May, 2010, actual production was about 6.6 million
tonnes, which is about 1.3% higher than that of the corresponding period of 2009. From June
until December 2010, production is expected to amount to 11.25 million tonnes, compared to
11.09 million tonnes to the same period last year. Thus, Malaysian palm oil production for 2010
is expected to reach 17.8 million tonnes, about 1.4% higher than that of the 2009 production
(Table 3). The increase is mainly attributed to the increase in total planted area, expected to be
about 4.82 million hectares in 2010, representing an increase of 2.8%. Out of this, matured area
is projected at 4.2 million hectares, representing a 2.6% increase. OER is projected at 20.5%,
while FFB yield is 19.26 tonnes per hectare compared to 20.49% and 19.2 tonnes per hectare in
2009.

13
 Table 3. Projected Palm Oil Balance in Malaysia in 2010

CPO CPO
Production PO Export E. Stock Local Disap PO Import Production

Year (i) (ii) (iii) (iv) (v) (vi)

2010 Jan 1,248,208 1,461,747 2,003,175 177,806 155,803 1,321,304

1,149,269 1,295,038 1,789,194 132,303 64,091 1,156,814

Mac 1,301,369 1,396,949 1,655,748 88,004 50,138 1,387,234

1,374,842 1,285,467 1,622,580 232,999 110,456 1,306,228

May 1,479,467 1,362,056 1,562,323 292,065 114,397 1,385,424

1,470,615 1,410,400 1,462,538 250,000 90,000 1,470,615

July 1,578,402 1,490,000 1,390,940 250,000 90,000 1,578,402

1,689,112 1,480,000 1,440,052 250,000 90,000 1,689,112

Sept 1,804,800 1,515,000 1,569,852 250,000 90,000 1,804,800

1,734,383 1,490,000 1,654,235 250,000 90,000 1,734,383

Nov 1,581,485 1,400,000 1,675,720 250,000 90,000 1,581,485

1,388,053 1,300,000 1,603,773 250,000 90,000 1,388,053

Total 17,800,004 16,886,657 2,673,176 1,124,885 17,803,855

Note: Cells shaded with gray color contain forecast figures

Cells shaded with diagonal lines contain assumed figures
Column (i) - CPO production forecast for the whole year
Column (vi) - CPO production using forecasts for June to December and actual for January to
May
Bold and italic figures are estimated (column (iv))
CPO Production Forecast (2010):
1) Forecasts the whole year = 17.8 million tonnes (column (i))
2) Forecasts only for June - Dec and combine with actual figures for
Jan - May = 17.804 million tonnes (column (vi))

14
b) INDONESIAN OIL PALM INDUSTRY

i) Oil Palm Areas

Indonesia and Malaysia both have similar type of soils and climate, Thus, Indonesia too can
plant oil palm, in addition to coconut trees, rubber and cacao. The country started its oil palm
cultivation commercially in 1911 on the East coast of Sumatra Island. In 1969, production by
this country was 180,000 tonnes of CPO and 40,000 tonnes of palm kernel. Prior to 1974,
plantations were mostly run by smallholders because of easy marketing.

In 1974, Indonesian government responded to the attractive high prices of palm oil in the
international market which then followed by the initiative to form state owned plantations
(Nucleus Estates Schemes). As a result, oil palm areas began to expand in 1975 from Sumatra to
Kalimantan and to Irian Jaya (Papua) with areas increasing from 295,000 ha. in 1980 to 1.6
million ha. in 1995 and from 4.2 million ha. in 2000 to 6.07 million ha. in 2006 (IPOB, 2007)
(Figure 11). In 2006, total growing area is distributed among three groups, which include
government holdings, private companies and small holders. According to Indonesia Bureau of
Statistics (BPS) in 2006, 45% of total palm area is owned by private companies, followed closely
at 43 % by small holders, and the government comprising the remaining 12%. Small holders are
frequently part of partnership scheme with private companies (USDA, 2007).

Over the past few years, the pace of Indonesian palm oil production had dominated other
producing countries and rose steadily. This continued increase in production is a result of area
expansion. It is the availability of land on Borneo and other previously non-developed areas that
had allowed Indonesia to become the top producer. From 180,000 tonnes in 1969, Indonesia
expanded its production to 7 million tonnes in 2000 and in 2009, it was about 21 million tonnes.
The islands of Sumatra, Borneo, Sulawesi and West Papua have opened up their regions in
recent years and have added significant areas that only now are coming on-stream in terms of
production. In addition to new areas of land developed, another reason for the growing
production numbers is that the surge in planting activity during the past ten years is now
beginning to be realized. There is a several years lag time when palms are initially planted on
the plantation until the first production of fruit bunches. Data on actual area planted to oil palm
is not easily obtained. Where government data does exist, many in the industry believe that the
15
government data is not as complete as it might be, often having production estimates lower than
those of the industry. One proxy source of area data is oil palm seed sales. Data presented at the
International Palm Oil Congress 2007 on seed sales reveals a rapid increase in demand, so much
that seed producers have had difficultly keeping up with demand.

Indonesian palm oil has the potential to expand in the future due to large land bank. Currently the
potential land availability for oil palm in Indonesia is about 26 million ha. scattering from Acheh
to Papua (Irian) (Hasibuan, 2006). In line with such potentiality, Indonesian government has set
a target to expand by 3 million ha. to produce additional 10 million tonnes of palm oil for
domestic and export market. However, this effort needs a huge amount of investment of about
USD 8.4 billion to USD10.5 billion for the 3 million ha expansion. Recently, China was
interested to invest in oil palm in Kalimantan border.

Indonesian Oil Palm Planted Area ('000 ha) and CPO Production ('000 tonnes)

20000

15000

10000
Area and CPO

5000

0
198

198

199

200

200

200

200
0

Oil Palm Planted AreaCPO Production

Figure 11: Indonesia Oil Palm Areas for 1980 – 1995 and for 2000 – 2006
Source: Direktorat Jenderal Perkebunan, Buku Statistik Perkebunan 2006

ii) Oil Palm Productivity

Indonesian oil palm productivity in 2006 varied among producers. Smallholders’ productivity
were low at 2.34 tonnes of palm oil per ha. per year. This is because they can get 13 tonnes of
FFB with an oil extraction rate (OER) of 18%. Small companies harvested 16 tonnes of FFB
16
with an OER of 19%, giving a productivity of 3.04 tonnes of palm oil per ha per year. Big
companies, due to good management practice, can get 23 tonnes of FFB per ha per year with an
OER of 24%. With this, their productivity was high at 5.52 tonnes of palm oil.

iii) CPO Production

Production of CPO in the country had increased as area expanded (Figure 11). However, the rate
of increase is faster for production than that of area. Production was about three quarter of a
million tonnes in 1980 and grew to about 4.2 million tonnes in 1995. In another portion,
production was about 7 million tonnes in 2000 and rose to about 20.9 million tonnes in 2009
(MPOB,2010).

Production of CPO is always larger than domestic consumption needs. The gap between the two,
however, was smaller in 1999 but widened by year towards 2009. This is because the production
expands more rapidly compared to that of domestic consumption. In 2008, the production had
reached about 19.2 million tonnes while domestic consumption was slightly higher than 4.5
million tonnes and it is expected that the proportion of domestic consumption will stay constant
at around 23% in the future. Based on this development, Indonesia has a great potential as a big
exporting country of CPO in the world. In 2009, Indonesia had overtaken Malaysia as the biggest
palm oil exporter. In addition to excess supply of CPO, exports also depend on the world market
opportunity and capability of the Indonesian industry to make good use of this opportunity.

iv) Palm Oil Demand

From the total domestic demand, a portion was allocated for domestic cooking oil to cater the
need for 220 million people in the country. The per capita consumption of cooking oil per year is
about 12 kg, comprising of 10.5 kg per capita of RBD palm olein and 1.5 kg per capita of
coconut oil. Based on this, 2.31 million tonnes of palm cooking oil is needed or an equivalent of
3.2 million tonnes of CPO per year.
17
Similarly with Malaysian palm oil, other forms of demand for palm oil in Indonesia are soap
making and oleo-chemicals. A total of about 200,000 to 500,000 tonnes of CPO will be needed
each year. As such, total domestic demand for palm oil amounted to 3.4 to 3.7 million tonnes per
year.

In term of total export of palm oil, Figure 12 shows that export volumes of palm oil increased
significantly since 1998; however that of CPO is less significant. Palm oil exports rose from 2.2
million tonnes in 1998 to 15.9 million tonnes in 2009, an increase by seven times. Indonesia has
more than 100 export destinations.

Indonesian Export of Palm Products

14000
12000
10000
8000
6000
4000
2000
('000

CPO ExportPO Export

Figure 12: Export of Palm Products

v) Outlook for Indonesian CPO production

Indonesia performed significantly well since 2000 in term of CPO production. Figure 13 shows
its trend protruding upwards in a straight line, compared to Malaysian production which formed

18
a less steep slope. Indonesia has a good infrastructure and land availability, so there is a great
chance for the country to continue its production growth momentum in short-term. However, as
mentioned earlier, Indonesian data is a problem. Thus, in projection it is important to mention the
sources of the data. Hence, based on the land availability and past performance of the oil palm
areas, forecasts are made using various scenarios and comparisons were made with other sources
(Table 4 and Table 5).

Indonesia is forecasted to have its planted areas growing to about 7.91 million ha. in 2010 from
about 7.55 mil ha in the previous year (Table 4). Out of this, 6.01 million ha. (5.73 million ha.
from Oil World) are matured areas in 2010. As such, CPO production in the country is projected
to reach about 22.91 million tonnes in 2010 (Table 5).

Figure 13. Malaysian and Indonesian CPO Production

19
 Table 4. Past Performance and Prospects in 2010 of Indonesian Oil Palm Areas

Year Planted Areas Matured Area from

(mil. ha)
Mil. ha Source MPOB Oil World
2006 6.07 IPOB 4.01 -

2007 6.91 MPOB 4.3 4.54

2008 7.20 MPOB 5.01 4.95

2009 7.55 MPOB 5.47 5.35

Forecasts

2010 7.91 MPOB 6.01 5.73

Note : IPOB – Indonesian Palm Oil Board

Table 5. Past Performance and Prospects in 2010 of Indonesian CPO Production

Indonesian CPO Production from

(mil. tonnes)
Year MPOB Oil World

2007 18.5 17.3

2008 19.3 19.23

2009 20.9 21.14

Forecasts

2010 22.91 22.3

20
WORLD DEMAND FOR PALM OIL

a) Demand Factors

The popularity of palm oil can be due to the fact that palm oil is so flexible and versatile that
advanced technology had been able to increase its areas of application. Presently, it can be used
in either in food or non-food applications or either used as it is or in fractionated forms to
produce a wide variety of products. Domestic consumption in both countries, Indonesia and
Malaysia, are very low, but globally, it is being consumed all over the world. However, the
demand for palm oil depends on various factors as follows:

i) World Population

It is a well known fact that world population significantly affects demand (exports and domestic
consumption) for oils and fats. Both variables had increased in the past; the population increased
from 5.5 billion people in 1993 to 6.3 billion in 2006 and demand from 116 million tonnes to 170
million tonnes during the same period. Developing and less developing countries are expected to
have greater population growth than developed countries in future. Thus greater demand growth
can be expected to come from these two categories of countries.

ii) World Income

Another important factor that will shape future demand pattern is the income of the world
population. It is expected that income from the developing countries will grow at much faster
rates than that of the developed countries. This in effect will increase the per capita consumption
of oils and fats, especially palm oil.

iii) Additional Application in Biodiesel

Another avenue that will increase demand for palm oil is its usage in biodiesel applications. The
world is looking for alternative energy source due to rising concern over the environment and
escalating petroleum prices. As such, edible oils source is the best alternative. This is a new
application where palm oil is feasible to be used in future. Malaysia will allocate some of its

21
production to this application and usage for edible purposes will be reduced. However, Malaysia
will make sure that the supply for edible uses will be sufficient by controlling the licenses issued
for this business.

iv) Exchange Rate

Exchange rate between two currencies specifies how much one currency is worth in terms of the
other. For example an exchange rate of RM3.50 to the United States dollar (USD, $) means that
RM3.50 is worth the same as USD1. The exchange rate plays an important role in determining
the volume of palm oil to be purchased which may ultimately have an indirect effect on price
later on. Depreciation (appreciation) of RM will lower (increase) the USD value, thus enabling
more demand for the commodity.

An example will illustrate this better. Since palm oil is traded in international market, its price is
quoted in USD. Let say price of palm oil is say RM2,000 per tonne and exchange rate is RM3.50
to USD1.00. An equivalent price in USD is USD571 per tonne. If RM depreciates to RM4.00 to
USD1, this gives USD500 per tonne of palm oil. Depreciation will lead to more palm oil can be
purchased by importers, thus increasing demand. As a result, as more palm oil is demanded,
stock will reduce at the end of a period (year) which will then affect the price. That means there
is a lag effect of rate on price of palm oil.

b) Outlook for Global Demand for Palm Oil

The demand for palm oil increased due to the wide applications and availability of the products.
Due to this, palm products are being exported to all over the world either in big volumes or small
volumes. Figure 14 shows total export volume of palm oil and of oils and fats from all over the
world from 2000 to 2009. It is clear from the figure that export of palm oil represented the major
component of oils and fats exports and the increase in the latter is mainly due to the increase in
the former. As mentioned earlier, palm oil is mainly exported by Malaysia and Indonesia since
their local consumptions are very low.

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Whatever being exported to the world market will usually being consumed. This volume plus the
local consumption in all producing countries will total up to become global consumption of palm
oil. From Figure 14, total consumption, as depicted by total disappearance, of palm oil increased
since 2000 in tandem with total consumption of oils and fats. Although the proportion is small,
less than 50%, it formed the major component of oils and fats consumption.

Figure 14. Global Export, and Disappearance of Palm Oil and Total Oils and Fats

It is no doubt to say here that based on the past trends of palm oil export and consumption
(taking also into consideration most of the demand factors mentioned above), palm oil will
continue expanding in volumes for both its export and consumption sectors. In 2010, palm oil
exports globally will increase to 38.82 million tonnes out of which Malaysian and Indonesian
exports are expected to be about 16.9 and 17.9 million tonnes. Total exports of oils and fats are
projected at 66.82 million tonnes (Table 6). Meanwhile palm oil consumption globally will

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increase further to 48.90 million tonnes and total consumption of oils and fats at 171 million
tonnes.

Table 6. Export and Consumption of World Palm Oil (‘000 tonnes)

Countries Exports of Palm Oil Palm Oil Consumption

2009 Forecast 2009 Forecast

for 2010 for 2010

Malaysia 15,881 16,887 Not done Not done

Indonesia 15,910 17,900 Not done Not done

Others 3,361 4,033 Not done Not done

TOTAL PALM OIL 35,152 38,820 45,188 48,980

Other Oils and Fats 27,038 28,000 118,700 122,000

TOTAL OILS AND FATS 63,090 66,820 163,888 171,000

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PRICES OF PALM OIL VERSUS PRICES OF OTHER SELECTED OILS AND FATS

CPO is traded locally as well as internationally. The CPO prices in both markets are inter-
related. In the international market, the increasing trade and continuous demand and availability
of palm oil at global market have made the prices of high quality palm products from Malaysia
to be very competitive with other oils and fats. Due to this competition, they had moved in
tandem in the past while establishing a very common feature of volatility (Figure 15). The prices
fluctuated depending on the supply and demand factors and other relevant factors. Soybean oil
price and stock are two common factors affecting the CPO price. They had been used by many
analysts in analyzing CPO price because soybean oil and CPO are two close substitutes while
stock reflects availability of palm oil in the market. In the latest scenario, crude petroleum price
is also relevant to be considered in determining CPO price. The development in the petroleum
price has caused many countries to consider using alternative renewable energy from vegetable
oils. Consequently, this created additional demand for these oils, including palm oil.

Figure 15: Prices of Selected Oils and Fats

In comparing the oils and fats prices, it should be remembered that the palm products could be
processed products while the other selected oils are in the crude form. Furthermore, these prices

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can be either on Free on board (FOB) or Cost, Insurance and Freight (CIF). As a rule of thumb
that can be used in bringing FOB prices to CIF would be to add the following to the FOB prices:

a) US$60 per tonne freight charges

b) 1% of FOB value for insurance
c) 2% of FOB value as arrival loss
(It is important to note that freight cost also depends on the size of the consignment).

Having known the CIF prices of selected oils and fats, one can easily compare them. Thus for
comparative purposes, the average CIF landed prices for oils and fats in say, the EU, in 2008 are
illustrated in Table 6. These landed prices had taken into consideration the common custom tariff
specified for each oil or fat. Palm products such as RBD palm olein, RBD palm oil, CPO, were
sold at a discount to soybean oil, cottonseed oil, rapeseed oil, sunflower seed oil, and groundnut
oil in the EU. The biggest discount was with ground nut oil while the smallest discount was with
soybean oil, its close competitor.

It has become the tradition that RBD palm olein was always being discounted by soybean oil. In
Figure 16, there were only three months (May and June 2007 and December 2009) in which
palm olein was sold at a premium to soybean oil. In other months, palm olein was discounted in
the range of USD50 to USD150 per tonne during the past three years. Thus, although one may
think that RBD palm olein is very expensive, price of its substitute, soybean oil, is even more
expensive.

In comparison, prices of oils and fats with different characteristics did not associate very well.
For example, soybean oil, coconut oil and tallow prices moved independently in the international
market (Figure 17). These oils and fats have different characteristics and being used in different
applications as they are not substitutes. As a result, their prices are not closely associated.

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 Table 6: Average CIF Prices for Oils and Fats and Premium/Discounts to Palm Oil Products,
2008

Name of Oils/Fats Average CCT Landed Premiums/Discounts

CIF for Price RBD RBD Crude RBD Palm
Prices edible Palm Palm Palm Palm Kernel
(US$/ Oils Olein Oil Oil Stearin Oil
tonne) (%)
RBD Palm Olein 1067 9 1163 - NR NR NR NR
RBD Palm Oil 1006 9 1097 NR - NR NR NR
Soybean Oil 1258 9.6 1379 -216 -282 -397 NR NR
Cottonseed Oil 1553 9.6 1702 -539 -606 -720 NR NR
Rapeseed Oil 1329 9.6 1457 -294 -360 -474 NR NR
Sunflower seed 1499 9.6 1643 -480 -546 -661 NR NR
Oil 2109 9.6 2311 -1148 -1215 -1329 NR NR
Groundnut Oil 1130 10.9 1253 NR NR NR NR NR
Palm Kernel Oil 1224 10.9 1357 NR NR NR NR -104
Coconut Oil 891 10.9 988 NR NR NR NR NR
RBD Palm
Stearin 885 6.4 942 NR NR NR 46 NR
Tallow Fancy 949 3.8 982 NR NR - NR NR
Bleached
Palm Oil, Crude
NR - Not Relevant, CCT = Common Customs Tariff
Premiums are indicated by a positive sign; the other figures are all discounts, (based on
landed price)
Sources: Oil World Annual 2009; Official Journal of the EC
Oil World Monthly-March, 2009

Figure 16: Prices of Oils and Fats with Similar Characteristics

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 Figure 17: Prices of Oils and Fats with Different Characteristics

Outlook for Palm Oil Price

World palm oil industry is fast catching up and its production has already overtaken production
of soybean oil to be the world leader. Palm oil will continue to maintain at the premier position
in future with Malaysia and Indonesia being the major suppliers. However, Malaysia would
likely face shortage of land for oil palm cultivation. Despite this, Malaysia has the edge of
producing high yielding planting materials which will increase its production. Researches help
the industry to grow, be competitive and sustainable in future. Most important of all, Malaysia
has a long-term experience in the industry with products bonded by the internationally known
Palm Oil Refiners Association of Malaysia (PORAM) specifications and has an effective
controlling and research and development (R & D) agency like MPOB. This makes the quality
of Malaysian palm products are of much high quality. Indonesia, on the other hand, will also
continue expanding its palm oil as the country has much land availability and labour.

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Thus, there will be a continuous and increasing supply of palm oil in future. One can thus be
assured of supply availability in future either from Malaysia or from any other producing country
such as Indonesia.

Forecasting price is quite a challenging effort as its behaviour is very unpredictable in nature. In
future, many factors are unpredictable in nature too, such as weather, war, and world supply and
demand factors. In the case of weather, no one can say exactly when drought, El Nino or La Nina
will take place. However, as mentioned above the effect of El Nino is very minimal in 2010.

The relevant factors to be considered in forecasting price of palm oil are the stock-usage ratio of
oils and fats, price of soybean oil, and the price of crude petroleum oil which indirectly effect on
the availability of palm oil for edible purposes. Using these factors, forecasts for palm oil prices
show that palm oil price in 2010 is expected to be in the range of RM 2400 to RM2800 (or
USD706 to USD824 at USD1 = RM3.40) per tonne. Beyond this year, price of palm oil can be
expected to be stabilized at RM2,400 per tonne due to the additional effect of biodiesel. It is
worth mentioning here that price of soybean oil will also increase undoubtedly in the future.
Nevertheless, these forecasts can be used as guidance in making trades for palm oil.

CONCLUSION

Palm oil is one of the most produced and traded commodities. Compared to other oils and fats, it
has positive and better economic advantages. It is also very versatile and flexible that advanced
technology can increase its areas of applications that lead to wide uses in food or non-food
applications, thus increasing its demand.

Malaysia as a big producer and exporter of palm oil in the world will continue increasing its
output and exports in future. This is due to the fact that Malaysia has the ability to do that based
on the resources available in the country. China will continue to be Malaysian partner in
consuming palm oil and relationship between the two countries will be maintained.

Research activities are still being carried out in Malaysia to find new uses of palm oil. This is the
main thrust of Malaysian Palm Oil Board. It is hoped that the current uses and future applications

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of palm oil will create more consumers in future, thus increasing demand from all over the
world, especially China and other consuming countries.

Generally it be safely said that prospect for palm oil in future is very bright.

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