Why Indons replaced M'sia as top palm oil producer?

Commodities Talk - By Hanim Adnan
Malaysian palm oil sector must not lose its focus

INDONESIA’S taking over Malaysia as the world’s largest crude palm oil (CPO) producer in 2006 had often been associated with the mammoth size of the oil palm planted areas.
In fact, many however failed to comprehend that it was the much increased CPO production in the ensuing years – mainly in terms of higher fresh fruit bunches yield and oil extraction rates – that significantly set Indonesia far ahead from Malaysia’s continued stagnanting CPO production.
This year CPO production in Indonesia is targeted to hit 21.5 million tonnes versus Malaysia’s 17.5 million tonnes.
Within five years, the former is also targeted to produce 27 million tonnes annually while Malaysia production is still expected to linger at 17 million to 18 million tonnes.
While the glaring shift in the CPO production epicentre from Malaysia to Indonesia had resulted in changes in the supply equation, some market observers now fear that Malaysian plantation stocks could also stand to lose out on its attractiveness among international investors and fund managers.
Historically, the oil palm plantation sector in Indonesia had been the domain of state-owned companies. However, the early 1990s saw many private companies entering the industry, lured by attractive margins.
Now it is said that 60% of the 7 million ha total planted area is owned by private companies, of which many have been seeking listing on the Stock Exchange of Singapore (SGX) and the Jakarta Stock Exchange (JSX).
More recently, some quarters claim that regional plantation analysts have been putting foreign plantation groups like Indofood Agri and Wilmar International on their radar instead of the lacklustre rating given to Malaysian planters, which also have sizeable plantations in Indonesia.
Some say the shift to foreign-listed plantation groups, particulary Indonesia, could be due to its status as the world number one CPO producer and gradually being recognised as the future CPO price benchmark setter instead of Malaysia.
In fact, the Indonesian authorities had been busy setting up new CPO contracts to rival that of Malaysia’s Bursa Derivatives Exchange CPO futures (FCPO).
The FCPO is currently the world price benchmark for CPO.
In July last year, Indonesia launched its own CPO physical contract under the Jakarta Futures Exchange (JFE) and last April, a CPO futures contract was launched via the Indonesia Commodity and Derivatives Exchange (ICDX).
While these two Indonesian CPO contracts may still have yet to generate significant liquidity in their markets, there is a looming threat to Malaysia’s FCPO given the participation of many big names in the Indonesian oil palm industry in ICDX and JFE.
Therefore, with the multi-challenges faced by the local oil palm sector, it is pertinent to keep the momentum in terms of improving the stagnanting CPO production, focusing on aggressive replanting with higher-yielding clones, promoting more downstream industries and continuous roadshows among listed plantation companies to generate interest among international fund managers.
While Malaysia may no longer reign as the world’s number one CPO producer, it must try its best not to lose out on its current spot as the world’s largest exporter of palm oil products.
Deputy news editor Hanim Adnan believes that issues pertaining to oil palm production can be handled amicably should the Goverment enforce stricter replanting rules while the private sector must not be hesitant to undertake replanting despite the current attractive CPO price.