Published October 31, 2008

KL spending US$50m to replant oil palm

Move will cut output by 4% temporarily as govt aims to boost biodiesel use

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(KUALA LUMPUR) Malaysia, the No 2 palm oil producer, said yesterday that it will spend more than US$50 million to encourage companies to replant palm oil trees, causing a temporary 4 per cent cut in output, and will boost biodiesel usage. The government will replant 200,000 hectares with saplings, cutting the nation's annual output by 700,000 tonnes, Minister of Plantation Industries and Commodities Peter Chin said.
Roller-coaster fortunes: Demand for palm oil has been hit by overproduction, the end of a speculative bubble, and by slowing global growth

Malaysia's total palm exports last year was 13.7 million tonnes. The price of palm oil has plunged 45 per cent in the past year on concern that the global financial crisis will trigger an economic slump that will cut demand for commodities.

The measures come hot on the heels of an announcement this week from Indonesia, the world's largest producer, that it would cut its export tax to zero to help support the price of palm oil, which has fallen more than 60 per cent from highs earlier this year.

'We are taking steps to replant palm oil trees which are 25 years or older with high yielding varieties,' Prime Minister Abdullah Ahmad Badawi said.

He also announced plans to turn 500,000 tonnes of palm oil into biodiesel, reviving a long-stalled push to use it as a fuel. Government vehicles will start using biodiesel in February, he said.

The industry welcomed the measures, although alone, they will not be solve the problems of weakening demand.Demand for palm oil, which is used in a range of products from foods to cosmetics, has been hit by overproduction, the end of a speculative bubble which popped as Wall Street imploded, and by slowing global growth.

The price of crude palm oil is now RM1,560 (S$654.50) per tonne, 65 per cent less than its peak earlier this year and close to what analysts estimate is the RM1,500 per tonne break-even for mid-sized plantation companies. In 2006, Malaysia took the lead in developing Asia's biodiesel industry and granted licences to more than 90 firms to set up plants with visions of introducing palm biodiesel into the domestic market.

But until recently, sky-high prices and a preference to divert palm oil into the more lucrative food industry saw the government dragging its feet.

Now palm biofuel would have to compete with cheap domestic diesel, one of the lowest priced in Asia as the government still pays out subsidies from oil and gas export revenues. Malaysia consumes 10 million tonnes of diesel a year.

Malaysia's October palm oil stocks are expected to climb 4.6 per cent to a record level of 2.04 million tonnes as output still rose despite the holiday season amid a marked slowdown in shipments, a Reuters poll showed. Palm oil is a key export earner for Malaysia, accounting for more than RM35 billion, or 8 per cent of total shipments. Analysts say that for every RM100 drop in price, Malaysia stands to lose RM1.7 billion in export earnings. -- Reuters, Bloomberg