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					     Palm Oil Industry in Malaysia

     Skills & Knowledge for Sustained Development
     in Africa

     24 June 2009




                                                                                                            1
                                                                                                       1




   Origin of Palm Oil
        The oil palm tree (Elaeis Guineensis Jacq.) originated from West Africa in a belt from Angola to
        Senegal.
        The earliest archaeological evidence on palm oil consumption was found in an Egyptian tomb in
        Abydos.
            As no palm oil was produced in the country, the evidence implied that the oil had been traded
            during the time of the Pharaohs, 5,000 years ago



  Original steps to extract palm oil




   Harvesting           Cooking to          Separate         Softening      Pressing       Oil collection
   fruit                sterilise fruit     fruitlets        the            out oil
   bunches              bunches             from the         fruitlets
                                            bunch




        The oil palm tree (Elaeis Guineensis Jacq.) originated from West Africa with a history of
       consumption dating back to 5,000 years. Today it feeds ~3 billion people in 150 countries.


                                                                                                       2
Source: MPOC Publications
     Global Palm Oil Industry
                       Today, palm oil is one of the 17 major oils traded in the global edible oils & fats market.
                       Palm oil can be found in one out of every ten food products worldwide.
                       Key importers of palm oil today are China, India, EU-27 & Pakistan.

Global vegetable oil supply (M MT)
    250
                                                                                                                                                                                                                                        952
                                                                                                                                                                                                                                1,000
                                                                                                                                                                                                                                        3%
                                                                                                                                                                                                                                 3%

                                                                                             Supply Growth                                                                 207                                      1,840
   200                                                                                                                                                                                                               6%
                                                                                             (2010 -2020F)
                                                                                                                                                                               14% 28.17
                                                                                                           4.8%
                                                                                                                                                                                                                                                          11,748
                                                                                                                              161                                              17% 23.39                                                                   40%

   150                                                                                                                        14% 22.85                                                                  4,532
                                                                                                                                                                                                         15%
                                                                                   129
                                     121                                                                                      13% 20.59                                        29%
                                                                                   15%                                                                                                           60.7
                                                                                                 19.7
                                     16% 19.05
                                                                                   16%
   100                                                                                           20.03
                                     16% 18.91                                                                                33% 53.38

                                                                                                                                                                                                                                                  5,223
                                                                                                                                                                                                                                                  17%
                                                                                   35%
                                                                                                 45.44
                                     33% 40.36
     50
                                                                                                                                                                               46% 94.3
                                                                                                                              40%                                                                                    4,694
                                                                                   34%                                                          64.57
                                                                                                                                                                                                                     16%
                                     35%
                                                                                                 43.58
                                                   43.03


         0                                                                                                                                                                                                           China               EU-27            India
                                                                                                                                                                                                                     Pakistan            Bangladesh       United States
                                 2008                                         2010F                                      2015F                                            2020F
                                                                                                                                                                                                                     Others
                                     Palm Oil                         Soybean Oil                                   Rapeseed Oil                                      Others
                                                                                                                                                                                                                            World Palm Oil Imports(2008)
                                         Palm oil is expected to make up 34-46 % of vegetable supply (2010-2020F)

 Source: LMC – Oilseeds Outlook for Profitability to 2020 (Jan 2009), USDA Database – April 2009                                                                                                                                                                   3




     Palm Oil Value Chain & Applications
                                                                                                                                                                                                                  Downstream                    Consumer
                                Upstream                                                                                                   Midstream
                                                                                                                                                                                                                  Processing                    Products

ACTIVITIES
                                     Seed                                                                                              Trading                                                              Refining                           Packaging and
                                     production                                                                                        Crude palm oil                                                       Fractionation                      branding
                                     Nursery                                                                                           bulking                                                              Oleochemical                       Food products
                                     Cultivation                                                                                                                                                            Esterification                     Non-food products
                                     Harvesting                                                                                                                                                             Refined product
                                     Milling                                                                                                                                                                storage


PRODUCTS
                                     DxP seeds                                                                                             Crude palm oil                                                      RBD Palm Oil                    Cooking oil, frying fats
                                     Fresh fruit bunches                                                                                   Palm kernel                                                         Palm Fatty Acid Distillate      Margarine
                                     Crude palm oil                                                                                        Crude palm kernel                                                   RBD Palm Olein                  Shortening
                                     Palm kernel                                                                                           oil                                                                 RBD Palm Stearin                Vanaspati
                                     Biomass (Empty                                                                                        Palm kernel cake                                                    RBD PK Olein                    Ice cream, non-dairy
                                     Fruit Bunches,                                                                                                                                                            RBD PK Stearin                  creamers
                                     kernel shell, fronds)                                                                                                                                                     Cocoa Butter Equivalent         Candles, soap
                                     Palm oil mill effluent                                                                                                                                                                                    Emulsifiers
                           5

                                          7

                                                        9

                                                                      1

                                                                                       3

                                                                                                      5

                                                                                                                    7

                                                                                                                                  9

                                                                                                                                                   1

                                                                                                                                                                  3

                                                                                                                                                                                   5

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                                                                                                                                                                                                               Cocoa Butter Substitute
                       97

                                     97

                                                   97

                                                                  98

                                                                                   98

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   45,000
                                                                                                                                                                                                               Cocoa Butter Replacers          Vitamin E supplements
              74

                            76

                                             78

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   40,000
                                                                                                                                                                                                               Fatty acid, alcohols,           Confectionery
   35,000
                                 Food Use                                                                                     Non-Food Use
   30,000
                                                                                                                                                                                                               amines, amides                  Bakery fats
   25,000
                                                                                                                                                                                                               Glycerines                      Biodiesel
   20,000                                                                                                                                                                                                      Palm methyl esters              Energy generation
   15,000                                                                                                                                                                                                      Tocotrienol                     Animal feed
   10,000                                                                                                                                                                                                                                      Organic fertiliser from
    5,000                                                                                                                                                                                                                                      biomass
         0                                                                                                                                                                                               80%
              5

                       7

                                9

                                         1

                                               3

                                                        5

                                                                 7

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                                                                                            3

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          96

                   96

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     64

              66

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                                                                                                           88

                                                                                                                    90

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    19

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                   These days, palm oil and derived products are channeled into worldwide industrial and
                     commercial activities to churn out food products as well as non-food applications. 4
 Source: MPOC Publications, USDA Database
  Palm Oil Benefits
                                Versatile                               Healthy
      • As the cheapest traded edible oil, palm oil   • Balanced composition of saturated
        can be used for food and non-food               and unsaturated fatty acids
        purposes                                              Saturated palmitic acid (44%),
      • Examples of food use                                  Monounsaturated oleic acid (40%)
                Cooking Oil                                   Polyunsaturated fatty acids (10%)
                Shortening                            • Can be blended with other soft oils to
                Margarines                              meet AHA1 recommended ratio of
                Vanaspati                               1:1:1 (saturated, monounsaturated, and
                                                        polyunsaturated fatty acids)
                Cocoa butter substitutes
                                                      • High carotene content
                Key ingredient in instant noodle
                production                                •   15x higher than carrots

      • Examples of non-food use                          •   50x higher than tomatoes

                Oleochemicals                         • Cholesterol-free, no risk of trans fatty
                                                        acids
                Biodiesel
                                                              Does not require hydrogenation in
                Energy generation                             food use
                                                      • Contains vitamin E
                                                              Highest content of tocotrienols among
                                                              edible oils
                                                              Also contains tocopherols
                                                        Meets the FAO/WHO Food Standard
                                                        requirements under the CODEX
                                                        Alimentarius Commission Programme.



1. American Heart Association
Source: MPOC publications
                                                                                                   5




  Palm Oil Benefits

                                              Sustainable
  • Compared to other oilseeds, the oil palm tree:
        Has the highest oil yield per ha
        Requires the lowest fertiliser inputs (~1MT of fertiliser per planted ha)
        Productive cycle of ~25 years
  • RSPO-compliant producers are required to meet specific environment & social criteria
  • Eco-friendly practices
     • Wastage from plantations are reused e.g.
             EFB – mulched as fertilisers back in estates
             Palm kernel shells – biomass feedstock at mills for steam generation
             Palm oil mill effluent – biogas for electricity generation




    Not only does palm oil have the potential to feed world due to its abundance, but it is also a
                          versatile, healthy and a sustainable source of oil.
Source: MPOC publications
                                                                                                   6
      Oil Palm Cultivation Area
      Physical Conditions for Oil Palm Planting




                 - Prime Area
                 - Plantable Area
     Plantable = +/- 10 degrees off the equator.
     Prime areas = +/- 5 degrees off the equator.
       Located within the equator band
       Humid tropical climate
              Temperature range of 24-32 C throughout the year            °
                                                                          °
                                                                          °
                                                                          °
              Ample sunshine (~ 5-7 hours a day in all months)
              Evenly distributed annual rainfall of ~ 2,000mm
              Soil pH <7.5
              Relative humidity ~ 85%
              No stagnant water
    Oil palm hectarage in Malaysia has grown from 320,000 ha in the 1970s to over 4million ha today
                                                          t
   Source: MPOC publications, The Oil Palm 4 edition by R.H.V. Corley, P.B. Tinker
                                                                                                                                                              7




      Oil Palm Cultivation Area
                                                                                          6 , 0 00



        Global oil palm mature areas:                                                                  5,000
        10.5m ha in 2007                                                                  5 , 0 00
                                                                                                                    Oil Palm Mature Area (000 Ha)
            Indonesia: 5.0m ha
                                                                                          4 , 0 00
                                                                                                                     3,900          (2007)
            Malaysia : 3.9m ha
                                                                                          3 , 0 00

        Other oil crops
            Soybean                          :   94.6m        ha                          2 , 0 00



            Groundnut                        :   21.9m        ha                                                                                                   1,282

            Sunflower                        :   24.0m        ha                          1 , 0 00

                                                                                                                                  450     405
                                                                                                                                                      230
            Rapeseed                         :   27.2m        ha
                                                                                                0

                                                                                                     Indonesia     Malaysia   Thailand   Nigeria   Colombia          Oth
                                                                                                                                                                  countries

 Rapeseed                  0.69

                                                                                                               Average lifespan of a oil palm tree ~25
 Sunflower              0.45
                                                                                                               years
 Groundnut       0.19
                                                                                                               Palm clones planted in Malaysia &
                                                                                                               Indonesia : Tenera
Soybean oil         0.40


   Palm oil                                                                      3.65


          0.00     0.50        1.00   1.50       2.00   2.50       3.00   3.50     4.00                                       =                     X

                         Oil Yields (MT/Ha)
                                                                                                           Tenera                         Dura              Pisifera


      Relative to other oilseeds, the oil palm tree is the highest yielding oil crop at an average yield
                                                of 3.65MT/ha

   Source: Oilworld Database (June 2008)                                                                                                                      8
                 Palm Oil Industry Against Economic Cycles

                                        Historical GDP growth and CPO Prices (1980- 2008)
                       15.00                                                                                                                             3,000
                                                                                                                                                                                         There has been several
                                                                                                                                                                                         recession periods since
                                                                                                                                                         2,500                           1980.
GDP Growth (%)




                       10.00
                                                                                                                         Dot-Com Crash




                                                                                                                                                                 Price (RM/MT)
                                                                                                                          2000-2002
                                                                                                                                                         2,000
                                                                                                                                                                                         CPO prices cycles have
                        5.00                                                                                                                                                             been influenced by
                                                                                                                                                         1,500                           supply and demand
                        0.00
                                                                                                                                                                                         dynamics impacted by
                                                                                                                                                         1,000                           economic conditions
                        -5.00
                                       US Recession
                                                                                   Recession                                                             500                             However Malaysian
                                           1982
                                                                                   1990-1991
                                                                                                                     Asian Financial Crisis                                              palm export data has
                                                                                                                          1997-1998
                       -10.00
                                1980    1982     1984   1986   1988     1990    1992   1994    1996   1998      2000    2002    2004     2006     2008
                                                                                                                                                         0                               shown historical
                                                                                                                                                                                         upside trend
                                       World GDP Growth                    Msia GDP Growth                       CPO Price



                                                                                                                                                                                         As a food necessity,
                       18.00                 Malaysia palm oil export data (1980-2008)                                                                                                   demand for palm oil
                                                                                                                                                                                         has always been on
                                                                                                                                                                                         increasing trend due
                       16.00



                       14.00
                                                                                                                                                                                         to world population
                       12.00                                                                                                                                                             growth.
                       10.00

                                                                                                                                                                                         Outlook on CPO prices
          Million MT




                        8.00
                                                                                                                                                                                         expect to range
                        6.00
                                                                                                                                                                                         between RM2,000-
                        4.00                                                                                                                                                             2,300/MT (US 570-
                        2.00
                                                                                                                                                                                         660/MT) by end of
                                                                                                                                                                                         2009.
                        0.00
                                1980     1982    1984   1986   1988     1990    1992   1994    1996     1998    2000    2002     2004      2006   2008


                                                                          Msia Palm Oil Export Volume




                                Historical data shows that demand for palm oil as a food product has always been increasing
                                                         despite peaks and troughs in economic cycles
  Note: IMF regards periods when global growth is less than 3% to be global recessions.

       Source: MPOB website, OECD Financial Indicators database
                                                                                                                                                                                                                   9




                         Palm Oil Production & Midterm Prospects
                                                                                                               Palm Oil Production
                                                                                                               (M MT)
                                                                               0.83
                                                      1.41                     1.9%        4.33                100                                                                                                 94.30
                                                      3.3%                                10.1%
                                                                                                                                                                                                                           6.12
                                                                                                                90                                                               Supply Growth
                                                                                                                                                                                                                           2.15
                                                                                                                                                                                 (2010 -2020F)                             2.85

                                                                                                                80                                                                       8.0%


                                                                                                                70
                                                                                                                                                                                                 64.57             27.84
                                                17.31
                                                40.2%                                                                                                                                                      4.92
                                                                                                                60                                                                                         1.52
                                                                                                                                                                                                           1.89
                                                                          19.15
                                                                          44.5%                                 50
                                                                                                                                                                  43.58
                                                                                                                           43.03              42.34                                       3.86
                                                                                                                                    4.33                 3.70                                     22.77
                                                                                                                40                  0.83                 0.93                            1.03
                                                                                                                                    1.41              1.26                               1.27

                                                                                                                30        17.31
                                                                                                                                                                                 17.77                             55.34
                                                                                                                                              17.17

                                                                                                                20
                                                                                                                                                                                                  33.47
                                Indonesia       Malaysia     Thailand     Colombia      Rest of the World
                                                                                                                10         19.15              19.28                          19.65
                                            Total Production = 43m MT
                                                                                                                 0
                                                                                                                           2008               2009F                      2010F                    2015F            2020F
                                            World Palm Oil Production
                                                     (2008)                                                                  Indonesia        Malaysia          Thailand                   Colombia       Rest of the World




                         At a forecasted supply growth of 8%, palm oil is well positioned to meet global food and non-
                            food demands. Malaysia is the second largest producer and leading exporter of palm oil.

                 Source: LMC – Oilseeds Outlook for Profitability to 2020 (Jan 2009)
                                                                                                                                                                                                                  10
    Economic Importance To Malaysia
         Today, the palm oil industry has become a key economic growth driver in Malaysia
             Second largest contributor to 2008 external trade (~6.9% at RM 46bn)
             Direct employment ~570,000 people
             Estimated total employment ~860,000 (incl. downstream)




                                                           Electronics &
                                                        electrical products              Sector           No.     Capacity
             Others                                           41.8%                                             (MT/annum)
             32.5%
                                                                                         FFB Mills        408           93.2m
                                                                                         Palm Kernel      41              5.2m
                                                                                         Crushers
                                                                                         Refineries       50            19.2m
                                                                                         Oleochemical     17              2.6m
Chemicals & chemical                                                   Palm oil
     products                                                           6.9%
       6.2%
                                                   Crude oil and
                         Liquefied natural gas     condensates
                                 (LNG)                6.5%
                                 6.1%
             Malaysia External Trade (2008)
                        Total= RM663bn
     The palm oil industry has been a key economic growth driver by creating jobs and triggering
     downstream activities to bring in revenue for national development and stability, especially
                                        Malaysia & Indonesia

 Source: LMC – Oilseeds Outlook for Profitability to 2020 (Jan 2009)
                                                                                                                       11




   History Of The Malaysian Palm Oil Industry
                                                                                                                  TODAY
    Key Milestones
                                                                                     1970s-1980s
                                                                                                             Market Expansion &
                                                                                                           Product Diversification
                                                                 1960s
                                                                                    Industrialisation &
                                                                                      Origin Refining
                                                                                                                Malaysia and
                                      1917
                                                                  Crop                                          Indonesia are
                                                              Diversification           1970s:                  top palm oil
        1800s                                                                                                   producers
                                                                                        Expansion of
                                  Oil Palm
                                                                  1960s:                domestic                Existence of
                               Commercialisation
                                                                  Malaysia              refining &              world’s largest
       Oil Palm                                                   increased
                                    First                                               fractionation           listed
     Introduction
                                                                  cultivation           facilities              plantation
                                    commercial
                                                                  pace of oil                                   company via
                                    planting in                                         1980s:
      1875:                                                       palms                                         the Synergy
                                    Tennamaran                                          Malaysianisation
      Introduced to                                               Introduction of                               Drive2 merger
                                    Estate,                                             of 3 plantation
      Malaya by the                                               land                                          China, India, &
                                    Selangor                                            companies,
      British as an                                               settlement                                    EU are key
      ornamental                                                                        namely Guthrie,
                                                                  schemes (e.g.         Golden Hope and         consumers of
      plant                                                       FELDA1) as            Sime Darby              palm oil
                                                                  means to
                                                                  eradicate             Founding of KL
                                                                  poverty               Commodity
                                                                  Malaysia              Exchange (KLCE)
                                                                  overtook              for price setting,
                                                                  Nigeria as            hedging and
                                                                  world’s largest       dissemination of
                                                                  exporter of           market info
                                                                  palm oil

  1.   FELDA: Federal Land & Development Authority
  2.   The corporate merger of Guthrie, Golden Hope Plantations and Sime Darby was completed in 2007
 Source: MPOC Publications
                                                                                                                       12
History Of The Malaysian Palm Oil Industry
Oil Palm Introduction and Commercialisation
  The oil palm tree was first introduced to Malaya by the British as an ornamental plant in 1875 but
  it was only commercially planted in Tennamaran Estate, Selangor 1917 by Henri Fauconnier.
Crop Diversification Efforts
  Despite threats of the Emergency during the 1960s, the oil palm expansion in Malaysia was
  rapid as its economic potential was recognised by the Malaysian Government as a complementary
  crop to rubber in the poverty eradication programme.
       The Federal Land Development Authority (FELDA) first introduced the oil palm in 1961
       on an initial size of 375 ha to help the landless farmers.
       Due to the fall in rubber and tin prices, estate planting of oil palm tended to be on old rubber
       estate land when the prospects of high yields and profitability of palm oil were recognised.
       In 1966, Malaysia overtook Nigeria as the world’s leading exporter of palm oil.
  Compared to Malaysia, the Indonesia government only started to directly invest in state owned
  plantations in 1968.
Export Diversification
  Realising from historical experience with rubber and tin that dependence on narrow product lines can
  bring price downswings, the Malaysian government embraced diversification as a way to sustain
  production and exports.
       Acting against the advice of international agencies, the Malaysian government began in the late
       1970s to encourage a shift from CPO exports to refined products through taxation and
       incentive policies.
       The 1980s saw the “Malaysianisation” of 3 major plantation companies previously run by
       the British i.e. Sime Darby, Guthrie and Harrison & Crossfield (later Golden Hope Plantations)
       1980 also saw the founding of the Kuala Lumpur Commodity Exchange (KLCE), a key
       instrument for price setting, hedging and dissemination of market information to reduce
       market risk in the trading of palm oil.

                                                                                                  13




History Of The Malaysian Palm Oil Industry
Industrialisation & Market Expansion
  Seeing the need for product development to sustain the upstream development of palm oil, the industry
  was flagged for sectoral support under the Industrial Master Plan of 1986 (IMP1).
       The IMP1 emphasised on the rationalisation of refining and fractionation to increase efficiency and
       competitiveness of Malaysian palm oil in the world market.
       As a result, Malaysia became a hub of palm oil downstream processing as it was more
       economical to export refined products than to have them processed in Europe.
       While Malaysia became a leading exporter of refined oil, demand for CPO exports then shifted
       to Indonesia as further oil palm expansion was encouraged through Indonesian government
       initiated smallholder schemes.
  By the time the Industrial Master Plan 2 (IMP2) was launched in 1996, Malaysia’s processing
  capacity has exceeded the supply of CPO.
       IMP2 led to the expansion of oil palm hectarage to East Malaysia and also encouraged the
       private sector to seek raw materials from abroad.
       IMP2 also saw stimulated participation in R&D to meet the call for productivity gains and
       further value-added product development along the value chain.
       The Malaysian Palm Oil Council (MPOC) was tasked to develop a comprehensive strategy
       to position Malaysia as an international leader in the oils & fats market through
       promotional activities.
  Despite Indonesia having overtaken Malaysia as a leading producer of palm oil since 2007 due to its
  vast landbank expansion and labour opportunities, the industry is still thriving in Malaysia.
       Malaysia is still a leading exporter of palm oil to major consumers in China, EU and India.
       In fact, Sime Darby and FELDA, both Malaysian-based companies are today the world’s
       largest plantation companies (based on planted area).




                                                                                                  14
     Malaysian Oil Palm Area                                                                    Planted Area (‘000 ha) -2007
(‘000 ha)
                                                                                                       Total= 4.3 m ha
  5,000
                                                                                       470
                                                                                       11%                                         2,599
                                                                                                                                   61%
  4,500

  4,000
                                                                                 314
                                                                                 7%

  3,500

                   CAGR 1975-2007                                                              922
  3,000                                                                                        21%
                         5.9%

  2,500                                                                                      Private Estates       Govt. Schemes
                                                                                             State Schemes         Smallholders
  2,000
                                                                              Oil palm estates in Peninsular Malaysia were
  1,500                                                                       mainly converted from rubber plantations
                                                                              Oil palm hectarage has grown at a compound
  1,000                                                                       growth rate of 5.9% from 1975 to 2007
                                                                              Planted Area by region
   500                                                                             55% – Peninsular Malaysia
                                                                                   45% – East Malaysia
     0                                                                        Planted area by ownership
          1975   1980   1985    1990      1995     2000   2005    2007             60% – Private estates
                                                                                   29% – Government schemes (e.g. FELDA)
                         P.Malaysia    Sabah   Sarawak
                                                                                     7% – State schemes
                          Planted Area                                             11% – Smallholders

   While oil palm planting expansion in Peninsular Malaysia is likely to plateau, Sabah & Sarawak
      has been mooted for further expansion outlined in the Industrial Master Plan 2 (1996)
 Source: MPOB website
                                                                                                                             15




     The FELDA Story
     Poverty Eradication
       Concept adopted:
           Government agencies were set up (FELDA, FELCRA and RISDA) to allow plantation developed
           land to be distributed to the landless poor.
           Management expertise from the government was used to run the organised smallholdings.



     The FELDA story
       Involvement with oil palm began in 1961 with an initial area of 375 ha.
            Today planted oil palm hectarage stands at 722,946 ha.
            250 settlement schemes incorporating 95,000 families
       Selection criteria
            Age bracket of 21-50 years, married and physically fit
                                                                                        FELDA settler home
       Key success factors:
            Highly centralised administration and management
            Through FELDA’s integrated business operations along the palm oil value chain, FELDA provides
            support services to settlers ranging from basic community infrastructure to financing,
            processing & marketing.
            Settlers only given subsistence payment until the first crop harvest
            Settlers entitled to same sale prices of the produce as private estates
            Three stage development package:

                                                                 Settlers manage
                    Co-operative system
                                                                 small blocks of land          Settlers given
                    • Prepare settlers with
                                                                   • Encourage                 individual titles
                      know-how
                                                                       self reliance


   FELDA’s success story has tied the prosperity of rural Malaysia with the palm oil industry. Today
                     it is the largest plantation player with 723k ha planted area.
 Source: MPOC Publications, FELDA website
                                                                                                                             16
      Private Sector
          The private sector in the palm oil industry today consists mostly of integrated players with
          plantation estates and refineries.
          There are currently 41 plantation companies listed in Bursa Malaysia.
          However, there are also diversified and private unlisted companies participating in the palm oil
          industry.
          Sime Darby is currently the world’s largest listed plantation player by planted area (~530k ha),
               Contributing 6% of world CPO production.
               Market capitalisation of RM41bn

                               As at 18 June 2009                       Main         Second         Total
                                                                        Board         Board
                        # of Plantation Companies                            38               3          41
                        Market Capitalisation (RM bn)                      71.7             0.6        72.3

          Current Malaysian plantation PE ratios range from 10x-17x
          Today, most Malaysian private companies have expanded their coverage beyond the Malaysian
          border, owning plantation estates and running destination refineries overseas.
          The private sector has also played a role in developing smallholder plantations.
               E.g. Native Customary Rights (NCR) plantation development in Sarawak
                    Private sector contribute up to 60% of capital; providing funding & management
                    expertise
                    Smallholders contribute land and workforce
          The private sector has also acknowledge the importance of R&D and infrastructure development in
          the palm oil industry.


      The private sector currently accounts for 60% of planted area in Malaysia and have been active
               participant in shaping the Malaysian palm oil downstream and export sector


Source: Bursa Malaysia
                                                                                                                          17




      Key Drivers of the Malaysian Palm Oil Sector
      Government Policies in Malaysia
                                                                          Revenue from export tax of CPO
                                                                                Purpose of maintenance and development of
                        Import
                                                                                infrastructure
                       Substitution
                    Before 1970s                                          Financial incentives for palm oil refining
                                                                          40% abatement of corporate income tax for 2 years
                                                                          7 year tax holidays for pioneer status refineries
Methods
Taxation
                                                                          Introduced duty differences between CPO and processed
Incentives &                                                              palm oil
Allowances
                                                                               To stimulate palm oil processing activities in the
                                                                               country
                                                                               Avoid overburdening CPO producers
                       Export
                     Diversification                                           Protect duty revenue as much as possible
                                                                               Avoid providing financial support from other sources
               Late 1970s onwards
                                                                          Subsequently tax credits were focused to stimulate further
                                                                          downstream processing (fractionated products, cooking
                                                                          oil, margarine, vanaspati & shortening)

                                            Success of Malaysian downstream industry attributed to:
                 Big processors coordinated easily with MITI
                 Major palm oil processors were also oil palm cultivators
                 Strong support from MITI1, SIRIM2, MPOPC3, PORLA4 & PORIM5

           Since the 1960s, the Malaysian Government policies have moved from import substitution
               initiatives to export-oriented diversification detailed in the Industrial Malaysia Plan
 1.     MITI – Ministry of International Trade & Industry
 2.     SIRIM – Standards & Industrial Research Institute of Malaysia
 3.     MPOPC - Malaysian Palm Oil Promotion Council
 4.     PORLA – Palm Oil Registration & Licensing Authority                                                               18
 5.     PORIM – Palm Oil Research Institute Malaysia
   Key Drivers of the Malaysian Palm Oil Sector
   Government Policies in Malaysia
                      Industrial Master Plan 1                                                   Industrial Master Plan 2
                             (1985-1995)                                                              (1996-present)
  Area focus          Peninsular Malaysia                                              East Malaysia
                      Call for development of different                                Call for productivity gains
                      segments of the industry in the value                            Encouraged Malaysia to seek raw
                      chain especially oleochemicals                                   materials from abroad

   Human              Training institutes, universities                                Training focused on downstream products
  Resources           On the job training                                              Training of R&D personnel
                                                                                       Overseas training

  Technology          Adapt process and R&D technology                                 Localisation of machinery & equipment
                      from PORIM                                                       production
                      Local fabrication                                                     Reduce downtime and costs from
                                                                                            freight and exchange rate
                                                                                            fluctuations

Infrastructure        Rationalisation of palm oil refining and                         Expansion of bulking, onshore pumping,
                      fractionation                                                    storage and handling facilities in East
                            To increase efficiency and                                 Malaysia
                            competitiveness in world markets

    Tax &             Government incentives                                            Market coordinated incentives
  regulatory              Double deduction tax benefit on
   agencies               export sales
                          Export tax on CPO to reduce
                          supplies to destination refineries
                          in Europe
 The support for the palm oil industry outlined under the IMP emphasised on supply security and
                 development of different segments in the downstream value chain
                                                                                                                                  19




   Key Drivers of the Malaysian Palm Oil Sector
   Network Cohesion Between the Government and Private Sector

         Government                           Industry Associations                                      Smallholders/Govt Schemes
• Create vital institutions, MPOB            • Provide ex-ante                                          • Plantation owners
  and MPOC for coordination                    discussions between
  with:                                        captains of industry and
        Universities for research              government officials
        MITI for promotion of                                                                                       Private Sector
                                             • Examples:
        international trade                                                                             • Plantation owners
                                                   MPOA1
        Private sector for
        smooth informational                       PORAM2                                               • Palm oil refiners and
        flows                                      MOSTA3                                                 downstream processors




     Policy Implementation                     R&D Collaborations                                               Promotional & Marketing
             (Examples)                  • Research undertaken by                                                       Activities
 • Replanting subsidies                    universities (local & abroad)                                       • Coordinated trade policies
        Timed with glut in CPO           • Grants from government
        prices                                                                                                 • Overseas promotional and
                                         • Joint support and                                                     business efforts
        (2000 & 2009)                      commercialisation by private
 • Regulation and incentives on            sector
   palm oil refineries, biodiesel
   plants
 • Mandatory blending of palm B5        1.     MPOA – Malaysian Palm Oil Assocation
   biodiesel (2009)                     2.     PORAM – Palm Oil Refiners Association Malaysia
                                        3.     MOSTA – Malaysian Oil Scientists and Technologist Association


      Trust and systematic coordination between the government and associations of planters,
       processors and manufacturers have provided a smooth development and flow of industry
                                            information                                 20
      Key Drivers of the Malaysian Palm Oil Sector
      Skills and Knowledge Developed By The Malaysian Palm Oil Players

                            Upstream                                                     Downstream processing
      • Major plantation companies today ensure                            • Prior to the 1970s, palm oil refineries
        implementation of best estate practices:                             were mostly located in Europe.
               Engage experiences estate managers                                  Palm oil refiners initially acquired
               as plantation advisors                                              machinery & equipment from suppliers
                                                                                   at arms-length transactions
               Developed Agricultural Research
               Manual (ARM) as reference for                               • Subsequently Malaysian companies have
               planters                                                      since acquired destination refineries in
                                                                             Europe (e.g. Sime Darby and IOI)
      • Skills training for harvesters
                                                                           • PORIM1 (subsequently MPOB2) have
      • Introduction of mechanisation to reduce                              spearheaded process improvement
        labour dependencies                                                  technology
      • Development of standard mill operating                                         Today, most machinery & equipment
        procedures                                                                     are produced and fabricated locally
            Minimise oil losses                                                        Reduces downtime and costs
            Minimise machinery breakdown                                               exposure to freight and exchange rate
                                                                                       fluctuations




                                                                                                                     Golden Jomalina

                                                                            Unimills
                                                                                                Austral Edible Oil

     Infrastructure development and integration from upstream to downstream was possible due to
           economies of scale built up by local palm oil players and stable geopolitical conditions
1.     PORIM – Palm Oil Research Institute Malaysia (established in 1979)
2.     MPOB – Malaysian Palm Oil Board (merger of PORIM and Palm Oil Registration & Licensing Authority – PORLA)
                                                                                                                              21




      Key Drivers of the Malaysian Palm Oil Sector
      Research & Development

                                                     Breeding
     • In 1960, Malaysian Department of Agriculture established exchange program with
       West African economies and 4 private plantations to set up the Oil Palm Genetics
       Laboratory
     • Under the second IMP1, calls were focused on mass tissue culture and genetic
       engineering to improve planting material quality

                                                                   Education
                • Establishment of an agriculture-focused education institution - Universiti Putra Malaysia
                          To train agricultural and agro-industrial engineers and agro-business graduates to
                          conduct research in the field
                    Set up of training academies by private sector (e.g. Sime Darby Academy) to provide
                    on-the-job training.



                                                            Agencies
     • Set up of PORIM2 (subsequently MPOB3) to undertake R&D support
            Conduct training on chemistry, quality, analytical techniques, processing operations,
            transportation and handling of palm oil products
            Under IMP, role expanded to include training and R&D in oleochemicals, specialty fats and
            processed palm kernel oil

          Palm oil R&D efforts in Malaysia have seen an increase in value added and new product
                                        development breakthroughs

1.     IMP - Industrial Malaysia Plan
2.     PORIM – Palm Oil Research Institute Malaysia (established in 1979)
3.     MPOB – Malaysian Palm Oil Board (merger of PORIM and Palm Oil Registration & Licensing Authority – PORLA)
                                                                                                                              22
 Malaysia & Indonesia Palm Oil Industry Comparisons
                               Malaysia                                        Indonesia

Institutional support

• Policy              • PORLA            • MPOB               • Directorate General of Estate Crops
  Formulation                              (merger of
                                           PORLA &
• Research            • PORIM                                 • Indonesian Oil Palm Research Institute
                                           PORIM in
                                                                (IOPRI)
                                           2000)

• Associations        • Malaysian Palm Oil                    • Gabungan Pengusaha Kelapa Sawit Indonesia
                        Association (MPOA)                      (GAPKI)
                      • Palm Oil Refiners Association         • Assosiasi Minyak Makan Indonesia (AIMMI)
                        (PORAM)

    Relative to Malaysia, representation of the palm oil industry in Indonesia was seen to be
fragmented. Research efforts in Indonesia were focused on expansion of oil palm area rather than
                                       product innovation.

Type of Policies Implemented

                    • Export Oriented interventions           • Import substitution interventions
                          Resulted in deliberate                   Stabilise domestic price of cooking oil
                          export shift from CPO to                 Focused on upstream area expansion to
                          refined products                         increase CPO production
                          Motivated product                        Less successful in creating dynamic
                          development                              environment to encourage forward
                          Encouraged competition &                 linkages
                          market efficiency                        Encouraged rent seeking

      Malaysia pursued a more proactive policy to drive learning & innovation through key
 instruments of agencies, funding, network coordination. Lack of such instruments has largely
         restricted Indonesia to cultivation and processing to meet domestic demand.    23




 Issues & Responses
Current Issues                                          Policy levers/ Responses
  Maintain Malaysia’s position as a leading palm         Productivity enhancement efforts through:
  oil producer                                               Estate practices
        Landbank expansion limitations                       Mill practices
        Efforts to improve operational efficiency            R&D to produce high yielding planting
        and productivity                                     materials


  Susceptibility to price fluctuations                   Existing government policies
                                                              Replanting subsidies
                                                                   Reduce supply for mature trees to give
                                                                   way to new plantings
                                                              Palm biodiesel mandate, B5 in government
                                                              transportation
  Environmental/Sustainability concerns on:              Ensure RSPO compliance by plantation estates
      Oil palm plantation expansion                           Subsidies to smallholders to obtain RSPO
      (especially East Malaysia)                              certification
           Allegations of open burning, planting         Government policies on land conversion
           on peat soil, endangering orang utan               Oil palm in Malaysia can only be planted on
           habitats                                           idle land or designated agriculture land
                                                         Private sector and government agencies should
                                                         highlight existing sustainable practices:
                                                              Zero-burning replanting technique
                                                              Biological control in weed control, pest
                                                              control
                                                              Highlight policies on planting on peat soil
                                                              conditions



                                                                                                      24
 Issues & Responses
Current Issues                                    Policy levers/ Responses
 Consumer misconceptions on palm oil especially     Private sector cooperation with government
 in new markets e.g. China, Eastern Europe          agencies (e.g. MPOB, MPOC, MITI) to market
      Low quality oil                               and dispel misconceptions about palm oil
      Unhealthy                                     Joint cooperation with renowned universities or
                                                    R&D entities to publish reports on benefits of
                                                    palm oil products




                                                                                                25




 Conclusion
     Malaysia today has become a leading palm oil hub of trade and knowledge.
         The palm oil industry is a profitable business that provides opportunities to diversify
         into food and non-food products.
         The industry has been resilient, withstanding several economic recessions over the past
         century.
     However, this is subjected to several pre-requisites:
        Suitable soil and agronomic conditions
        Good infrastructure support in place
        Availability of good planting material
        Knowledge in plantation management and best practices
        Integration with modern milling and mechanisation processes
        Marketing capabilities & Quality control
        Access to R&D competencies for sustained development
     Network cohesion and sharing of information flow are also key between :
        Government and plantation sector
        Government to government
        Plantation sector and stakeholders
     Unlike other industries, benefits from the palm oil industry will only be reaped years
     later. We have to be passionate:
          ~ 3 years for commercial harvesting of new plantings
          Minimum payback of upstream greenfield investment ~6-7 years
          The economic cycle for upstream investment ~ 25 years
          ~ 2 years for a mill or even a refinery to begin operations




                                                                                                26
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