Highlights

The Government of Malaysia (GOM) decision not to extend the amnesty program for undocumented illegal foreign workers beyond July 1, 2017 saw the industry facing acute shortage of manual labor. In addition, the depreciation of Malaysian currency by as much as 30% made working in Malaysia less attractive as they earned less in Malaysian currency. No major weather anomaly is expected for the rest of the marketing year. As result, the 2016/17 production forecast is maintained at 19.5 million tons as Post anticipated the labor issue when previously forecasting the 2016/17 palm oil production.

Production

GOM’s strict enforcement clamping down on foreign illegal workers by penalizing both employer and employee with harsh punishment saw many employers sending back their illegal workers to avoid punishment. The high cost of rehiring foreign workers (in which the cost are deducted from the worker’s salary) and depreciation of Malaysian currency made Malaysia less attractive for returning foreign labor to work in Malaysia. It was estimated the palm oil industry employed 300,000 manual foreign workers of which, 30% are undocumented illegal foreign workers. With the end of Ramadan celebration on June 25, 2017, most undocumented Indonesian illegal workers who returned early for the occasion took the opportunity not to return. Thus June palm oil production suffered.

Although the palm trees recovering from tree stress from the El-Nino weather phenomenon and production is expected to increase, shortage of manual labor to harvest the fruits caused fruit left to rot on trees leading to a drop in collection of fresh fruit bunches (FFB) which lead to total palm oil production to drop.GOM initial forecast of 21.5 million tons production for the calendar year 2017 has been revised to 19.5 million tons to take into account labor shortage issues. To overcome this, GOM approved recruitment of Bangladeshi workers to replace Indonesian workers. However, plantation companies are reluctant to employ Bangladeshi as they are unable to withstand the demanding nature of the jobs.

With high seasonal production forecasted in the upcoming quarters, production is expected to improve, and forecasted production of 19.5 million tons is within reach. Thus, Post does not expect any weather anomalies that will hamper production in the near future. Production for 2017/18 is forecasted to increase to 21 million tons as trees fully recover from tree stress, and the industry is able to address labor issues. Total harvested area in 2017/18 is projected to increase to 5.2 million hectares, an area with palm trees that produces fruit at least once or twice a year. Fully matured hectare equivalent (MHE) area for 2017/18 is estimated at 2.74 million hectares; an area where plantation with palm trees that produces fruits at least 4 times a year.

Price

June’s monthly average delivery price was $677, down from $727 in May. The drop in price for June was attributed to a drop in exports to China. Exports of crude palm oil (CPO) to China dropped by as much as 39% from 113,200 tons in May to 68,556 tons in June. The reduction in price had widened the discount price between crude palm oil and soy oil by as much as $150. This will further boost export demand for crude palm oil from July onwards.In line with the drop in CPO price, the Refined/Bleached/Deodorized (RBD) Palm Oil FOB average price dropped to $667.5/ton in June from $681.5 in May.

Stocks

Stocks dropped from 1.55 million tons in May to 1.52 million tons at the end of June, partly due to lower production recorded in June. With expectations for high production over the next few months, stocks are forecast to increase further.

TRADE

2017/18 Outlook

Crude palm oil (CPO) exports for marketing year (MY) 2017/18 are forecast at 18 million tons, a million ton more than MY 2016/17. The increase is based on improvement in demand from India and the Middle East.

2016/17 Forecast

Exports in June 2017 dropped by 8.4% from 1.50 million tons recorded in May to 1.38 million tons in June. Shipments to China dropped as much as 39% from 113,200 tons to 68,556 tons. Other major markets also recorded reductions, thereby contributing to overall reduction of export of 8.4%. Comparing June 2016 with June 2017, exported recorded a 20.8% increase. Overall production for year 2015/16 was low due to El-Nino weather phenomenon. Duty export for June 2017 was 6.0% and for June 2016, 5.5%.

Exports market demand for MY 2016/17, are within the Post estimate of 17 million tons, a slight increase from 16.6 million tons recorded in MY 2015/16. Favorable weather and wide discount prices between crude palm oil price and soy oil will spurred crude palm oil export demand for the rest of the marketing year.

Imports

The import estimate remained the same, as Malaysian government (GOM) maintains import restrictions on CPO to reduce end stock at a manageable level.

CONSUMPTION

2017/18 Outlook

Palm oil consumption remained relatively stable with a slight increase of 20,000 tons, from 3.17 million tons in MY 2016/17. The increase is in line with population growth and marginal growth in biodiesel production for domestic consumption.

2016/17 Forecast

Post forecasts palm oil consumption for MY2016/17 at 3.17 million tons, as GOM was unable to proceed with the planned B10 biofuel mandate as originally planned. Even for MY 2017/18, due to budget constraint, GOM will not proceed to implement the B10 biofuel mandate and will only consider it once the price of petroleum is high, and end stocks of CPO are at unsustainable levels.

Palm Oil Production, Supply, and Demand Table

Oil, Palm

2015/2016

2016/2017

2017/2018

Market Begin Year

Oct 2015


Oct 2016


Oct 2017


Malaysia

USDA

New

USDA

New

USDA

New

Area Planted

0

0

0

0

0

0

Area Harvested

4,8

4,8

4,9

4,9

0

5,2

Trees

0

0

0

0

0

0

Beginning Stocks

2,641

2,641

1,546

1,546

0

1,279

Production

17,,00

17,7

19,5

19,5

0

21

MY Imports

816

816

800

800

0

450

MY Imp. from U.S.

0

0

0

0

0

0

MY Imp. from EU

0

0

0

0

0

0

Total Supply

21,157

21,157

21,846

21,846

0

22,729

MY Exports

16,621

16,621

17

17

0

18

MY Exp. to EU

2

2

1,9

1,9

0

2

Industrial Dom.

2,29

2,29

2,4

2,4

0

2,45

Food Use Dom.

650

650

720

720

0

700

Feed Waste Dom.

50

50

50

50

0

40

Total Dom. Cons.

2,99

2,99

3,17

3,17

0

3,19

Ending Stocks

1,546

1,546

1,676

1,676

0

1,539

Total Distribution

21,157

21,157

21,846

21,846

0

22,729