Friday, September 6, 2013

SWOT analysis to save palm oil industry

华商与经济转型系列83:SWOT救活棕油业

夏伟文 & 陈薛卉

Palm oil has an interesting place in Malaysian economy history. Originally grew wild in West Africa, it was introduced by British to Malaysia in early as an ornament plant. Commercial planting started by Frenchman Henri Fouconnier in 1917 in Tennamaran Estate, located at Batang Berjuntai, Selangor. At that time, tin mining and rubber plantation are the main engines of growth.
In 1953, Paley Report claimed that Malaysia’s reserves of tin will be exhausted round year 1980s. In 1960s, rubber plantation fading fast mainly because of losing competition to synthetic rubber and rising cost of production. Fear of losing these two growth engine, government introduced economic diversification program. Besides import-substitution industrialization, commercial palm oil plantation has been promoted not only as new engine of growth but best solution to eradicate poverty in rural.
Since then, Malaysia has been the No. 1 producer and exporter of palm oil in the world. However, Malaysia is currently only second largest producer behind Indonesia but still the largest palm oil exporter in the world. Its contribution to national economy has dropped to 4th largest, amounted for about 8% of national Gross National Income (GNI) per capita.
Nonetheless, palm oil plantation remains important and being selected as one of the twelve “National Key Economic Areas” (NKEA) in Economic Transformation Program (ETP).
SWOT Analysis & ETP Strategies
SWOT or “Strength, Weaknesses, Opportunity, Threat” analysis can give systematic assessment on palm oil plantation in Malaysia as well as suitability of ETP strategies on this area. In Sun Tzu’s Art of War, we should tap benefit from favorable opportunity and avoid threat to enhance our strength and minimize our weakness.
Strength
ETP has identified three strengths for Malaysian’s palm oil. Firstly, Malaysia has amongst the highest average palm oil yields per hectare per year at 21 tonnes. Our closest competitor, Indonesia has 19 tonnes per hectare. Entry Point Project (EPP 2) aims to further improve the average yearly fresh fruit bunch yield to 26.2 tonnes per hectare by 2020.
However, Statistical Department and Malaysian Palm Oil Board (MPOB) give different yields scenario as in Figure 1. Between 1974 and 2012, yields per hectare ranged from 15.90 tonnes (lowest, recorded in 1983) to 20.26 tonnes (highest, recorded in 1993). Average value for that period is 18.47 tonnes per hectare. Thus, if based on this average figure, the yield rate needs continuous annual growth of 4.467% starting from 2013 until 2020 to achieve its target.

Figure 1: Malaysia’s Palm Oils Yields per Hectare
Source: Statistical Department and Malaysian Palm Oil Board (MPOB)

Smallholders’ planter who collectively accounted to 63% of “backlog” palm oil trees (aged above 25 years) are main target group for improvement. Palm oil tree of that age is believed to give very low yield per hectare. Among the program planned to enhance yield are increasing expertise officers (called TUNAS) to give service to smallholders clustering all independent smallholders, mandating one of industry best practices for all and annual ranking of average yield for smallholders. Of course, a longer term solution will be replanting the palm oil trees that are older than 25 years as targeted in EPP 1.
Second strength is excellent plant breeding activities. ETP claimed that Malaysia has 20 world class seeds producers. They have annual production capability of 87 million seeds and leading in related Research and Development (R&D) activities. These most likely useful in producing higher yield seeds/plants, increasing palm oil extraction rate (EPP4) and developing downstream palm oil industry.
Thirdly, regulatory environment in Malaysia is believed to be conductive. The Malaysian Palm Oil Board Act 1998 replaced two old Acts on palm oil industry while dissolved three related regulatory bodies to consolidate into Malaysian Palm Oil Board (MPOB). The Acts is comprehensive in vesting power to enable conductive function of MPOB.
Weaknesses
The biggest weaknesses are perhaps (i) limited land bank and scope of mechanism, and (ii) reliance on upstream. ETP estimated that the country may able to increase land bank for palm oil up to 28 percent only or 1.3 million of additional hectare. These additional lands most likely will be on hilly or peat terrains while 75% (or 1 million of hectare) will be located in Sarawak. Making things worse, palm oil plantation heavily relied on foreign workers who are cheaper than but unfortunately not as cheap as in Indonesia, the current world largest palm oil producer. Mechanism may increase overall productivity, thus make up for the disadvantage in relative higher cost of production.
To increase workers’ productivity, EPP 3 proposed for changing from (i) manual harvesting to motorized harvesting known as “Cantas”, (ii) everyday traditional sharpening to “diamond” sharpening that can lasted about 5 days, and (iii) manual collection to buffalo assisted collection, which is 12 times less costly per unit than mini tractor grabber .
On the second weaknesses, our oil palm industry heavily depends on upstream segment, which involve mostly harvesting the palm fruits, production of crude palm oil and simple processed form like crude palm olein and palm fatty acid distilled. Upstream outputs usually have relatively lower value added as compare to downstream segment such as biodiesel and oleochemicals. Upstream segment contributed 87% of industry GNI and 81.5% of total export of variety types of palm oil output.
Thus, EPP 6 focused on development of oleo derivatives, which is a further process from basic oleochemical. The later is currently oversupplied in global market (expected to remain oversupply in near future) and has average lower profit margin at 7%. The higher-value oleo derivatives has higher average profit margin at 20%. Other strategies listed included commercializing second generation biofuels (EPP 7) and growing food-based and health-based downstream segment (EPP 8).
Opportunity
Raising global population and income may have caused global demand for oil and fats (includes palm oil) rising at an average rate of about 7% over the past ten years. Indeed, demand for palm oil growing relatively faster at about 10%. According to Bloomberg report on 7th May 2013, palm oil export globally is predicted to increase to a record high of up to two thirds of combined exports of seven major oils and fats. This is due to insufficient supplies of other oils and fats, price discount of palm oil as well as strong demand from China and India. Thus, this situation provides good opportunity for palm oil industry. Table 2 shows selected data of palm oil production, import, export and consumption extracted from United States Department of Agriculture (USDA).
Another opportunity for oil palm as compared to other types of oils is that the former has much higher yield per hectare versus its substitutes. Oil palm produces 4 to 5 tonnes of oil per hectare which is 8 to 10 times higher than other oil seeds such as rapeseed and soya bean.
Threat
Threats to palm oil industry have always been international anti-palm oil campaign and palm oil tree’s pest and diseases. Palm oils are constantly being attacked (believed to be orchestrated by American soya bean lobby group) on health and carbon footprint issues. Unjust tariff and smear campaign do harm palm oil competitiveness in global oils and fats markets, especially at non-Asian countries.
In pests and diseases aspects, ETP itself has acknowledged that long-term sustainable, cost-efficient and effective solution is still not available. The only temporary solutions currently are continuing research, early detection and constant control.
In the aspect of threat, no clear plan is found in ETP to reduce the mentioned threats. The only partially related measure is commercialization second generation bio-fuels (EPP 7) which is seem as environmental friendly and could reduce carbon footprint.

Table 2: Selected Palm Oil Production, Import, Export and Consumption (Thousand metric tonnes)
Year
2009/10
2010/11
2011/12
2012/13
2012/13 (% of total)
Production (Top 3)
Indonesia
22,000
23,600
26,200
28,500
51.5
Malaysia
17,763
18,211
18,202
19,000
34.4
Thailand
1,287
1,832
1,892
2,000
3.6
Total
45,909
48,680
51,884
55,293
100.0






Imports (Top 3) 
India
6,603
6,661
7,473
8,500
20.7
China
5,760
5,711
5,841
6,500
15.8
EU-27
5,438
4,932
5,618
5,800
14.1
Total
35,213
36,293
38,736
41,045
100.0






Exports (Top 3) 
Indonesia
16,573
16,423
18,452
20,100
48.3
Malaysia
15,530
16,596
16,600
17,200
41.3
Papua New Guinea
520
577
587
620
1.5
Total
35,512
36,862
39,034
41,603
100.0






Domestic Consumption (Top 5)



India
6,440
7,080
7,425
8,425
15.7
Indonesia
5,494
6,414
7,129
7,815
14.6
China
5,930
5,797
5,841
6,300
11.8
EU-27
5,210
4,813
5,530
5,575
10.4
Malaysia
3,103
3,220
3,058
3,193
6.0
Total
45,040
47,736
50,620
53,608
100.0

Conclusion
In conclusion, history has proved that palm oil can be an important source of growth for Malaysia. However, industrialization has eroded its contribution but increasing uptrend of palm oil price and global demand may help reviving palm oil industry in Malaysia. Yet, right strategies are critically needed to maximize the strength, minimize the weaknesses, take advantage of the opportunity and reduce the threat.
[Chinese version published at Nanyang Press, 28th January 2013. Available online at http://www.nanyang.com/node/550860. This English version may be slightly different from the Chinese/ newspaper version]

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