Malaysia’s palm oil industry faces tough market

The palm oil industry in Malaysia appears set for an uncertain few months, with a number of factors coming into play over the last quarter of the year that could push already low prices down even further, just at the time when production is about to peak.

As of the end of September, Malaysian palm oil prices were down 6% on the beginning of the year. Moving into October, the commodity was trading at $716 a tonne, with predictions it could fall further in the lead-up to the new year.

Malaysia has seen output rise monthly through to August, and while September’s figures have yet to be released, it is expected that volume will again be up. Some estimates put September’s production at close to 2m tonnes, a sharp jump from the 1.74m tonnes of the month before, which itself represented a 3.6% rise over July. This continued increase in output, which is likely to be maintained for the rest of the year – the high season – could further force down global prices as supply overtakes demand.

Also bearing on palm oil prices is the rising tide of soy oil flowing into the market, with the US soy crop set for a better-than-expected harvest and soybean stocks at higher levels than normal for this time of year. This has pushed soybean prices down to near two-year lows as of early October, a trend that will undercut demand for Malaysian palm oil.

Falling oil prices also set to weigh on sales

Another factor weighing down palm oil sales and pressuring prices is the drop in the cost of conventional crude oil. With oil prices falling, there is less appeal for biofuels in the market, and rising output from Libya combined with concerns over demand in the US as part of the fall-out from the shutdown of government, have pushed oil prices down. Benchmark Brent crude was trading at less than $108 a barrel in early October; WTI crude was lower still, dipping below $102, with analysts predicting a further decline in the weeks ahead as price instability posed by a potential US military strike against Syria recedes.

According to Dorab Mistry, head of vegetable oil trading with Indian conglomerate Godrej Industries, palm oil could fall to a four-year low of $617 a tonne in 2014 if crude oil prices go below the $100-a-barrel mark. This would represent a 13% fall on present prices, Mistry told an industry conference in late September.

“The fundamentals of the oilseed and vegetable oils complex are clearly bearish,” he said.

One factor that could boost sales is the drop in the value of the ringgit, which has retreated almost 9% since May. This has made exports more appealing, at least in some markets, though not in those that, like Malaysia, have been hit by the outflow of funds from developing economies. While the weaker ringgit may boost overseas sales, an easing of local currencies against the dollar has taken place in many of Malaysia’s key markets, such as India where the rupee has fallen by 12% since the beginning of the year. This means that any advantage accrued from the devaluation of the ringgit is offset by similar downward moves elsewhere.

Government plans could drain off excess

While palm oil producers may face difficulties in boosting sales abroad, help may be at hand at home. The government has said it is considering lifting the levels of palm oil added to diesel fuel as a way of boosting domestic demand. Malaysia requires a 5% palm oil additive to diesel; the resulting biofuel accounts for a significant portion of palm oil consumption, with nearly 250,000 tonnes of palm oil/diesel blend consumed in 2012, a figure the state aims to double by 2014. Indonesia recently announced it would be raising its palm oil input to biodiesel from 7.5% to 10% next year. Any similar move by Malaysia would help soak up excess production, though the government has yet to set any timeframe for an increase or how far above the current levels the rise would be.

Further state support came in mid-September, when the government decided to keep taxes on palm oil exports unchanged in October, maintaining the 4.5% tariff that has been in place since March. The decision is expected to help boost overseas sales during the peak harvest season and reduce the risk of a large build-up in stockpiles.

It may not be until well into the new year, when local production tapers off, that prices may start to move upwards to any significant degree, though crop losses due to adverse weather or a sudden jump in crude oil prices could give a boost to Malaysia’s palm oil sales. For the present, it seems the best producers can hope for are steady sales and for prices to remain at current levels.

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Malaysia: Targeting tourism growth

The hospitality sector, one of the region’s largest, is continuing to see visitor numbers grow this year, boosted by better transport connectivity with large emerging markets. This development is increasingly being linked with Malaysia’s overarching strategy of raising revenues and value in key economic sectors, a theme that is set to dominate the next few years.

According to Ng Yen Yen, the minister of tourism, Malaysia registered 11.63m arrivals in the first half of 2012, up 2.4% over the same period in 2011. Receipts grew more rapidly, increasing 4% over the same period to RM26.8bn ($8.81bn). Ng attributed the continuing rise in visitor numbers in part to improved connectivity (particularly with China) and events such as the F1 Malaysian Grand Prix and the Citrawarna cultural festival.

Other members of ASEAN accounted for around 73.8% of arrivals. Singapore, which has close cultural, economic and social ties to its northern neighbour, remained by far the biggest source of visitors, with 5.83m arrivals in the first half of this year. This number is likely to have been somewhat boosted by shuttle traders, who pass over the border on a regular basis, and day-trippers.

The other largest contributing countries were: Indonesia, with 1.11m arrivals; China (758,000); Thailand (639,000); Brunei Darussalam (588,000); India (365,000); Australia (243,000); the Philippines (238,000); Japan (216,000); and the UK (197,000). Arrivals from China were up 34.2% on the first half of 2011, India (6.9%) and Russia (28.2%). There was also impressive growth from established markets, including France (20.6%); the US (18.9%); South Korea (18%); Japan (32.5%); and the UK (5.9%).

Analysis of the figures by Tourism Malaysia, the official promotion and development agency under the Ministry of Tourism, indicates the importance of enhancing air connectivity in stimulating this growth. The organisation partly attributes the rise in arrivals from China to an increasing number of flights between Beijing and Kuala Lumpur, and Hong Kong and Penang and Kota Kinabalu, two major regional tourism centres.

Similarly, the increase in Japanese and Korean visitors is partly due to more flights between provincial cities in those countries and Kuala Lumpur and Kota Kinabalu. By the same token, Tourism Malaysia attributes declining visitor numbers from New Zealand, Australia and South Africa to fewer flights being operated. Meanwhile, Vijay K Gokhale, India’s high commissioner to Malaysia, said that if AirAsia restored flights to Delhi and Mumbai, which were suspended in March, Indian visitors to the South-east Asian market could rise to 1m annually by 2015 from around 693,000 in 2011.

With the importance of connectivity and tapping expanding markets in mind, the tourism authorities are continuing to work with Malaysian Airlines and AirAsia, the country’s two main carriers, to develop links internationally, and will continue to seek bilateral agreements with countries such as Russia to increase visitor traffic.

However, increasing visitor volumes is not the only priority. Indeed, over the coming years, this strategy seems likely to become less important than efforts to boost value and diversification. Malaysia’s Economic Transformation Programme (ETP), the government’s overarching strategy to push Malaysia towards developed-country status by 2020, notes that the country is a “high arrivals, low yield” tourism market.

The aim is to keep visitor numbers rising while building considerably greater value in the sector to increase earnings per tourist arrival. Tourism has been identified as a National Key Economic Area (NKEA) under the ETP, with the goal of attracting 36m visitors and generating RM168bn ($55.26bn) in tourism receipts by 2020.

In practical terms, this means focusing on high-value niche segments. The ETP has identified five such segments: luxury; nature adventure; family; events, entertainment, spa and sports; and business tourism. To develop these niche areas, a number of existing segments will need to be promoted, such as ecotourism and meetings, incentives, conventions and exhibitions (MICE). Malaysia will also need to be rebranded to well-heeled visitors as a “luxury” destination, leveraging the increasing number of top-end hotels, resorts and shopping malls.

Malaysia is in the fortunate position that it already has existing business in these high-value areas, as well as a strong international brand as a destination. But to meet the ETP’s targets, considerable investment will be needed, particularly from the private sector, in keeping with the plan’s priorities.

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Malaysia: Airline alliance

The forthcoming entry of Malaysia’s largest airline into the oneworld alliance, a group of the world’s major airlines, plus efforts among airlines to boost connectivity in Asia and invest in capacity to support long-term growth, are set to increase flight frequency and services.

Duncan Bureau, the senior vice-president of global sales and distribution at Malaysia Airlines (MAS), the country’s flag carrier, said recently that the airline is making progress toward its planned membership in the oneworld airline alliance, which is expected to be completed in early 2013. MAS is forming bilateral agreements on code shares with a number of oneworld carriers, most recently Cathay Pacific and Royal Jordanian.

To prepare, the airline has made a number of recent investments in newer, more fuel-efficient aircraft, which is expected to reduce its long-term costs, particularly on fuel. In August, MAS took delivery of its second Airbus A380. The new aircraft will allow MAS to increase its A380 service between Kuala Lumpur and London from the current three times a week to every day. A third A380 should be commissioned by the end of November, which will fly daily between Kuala Lumpur and Sydney. Also in August, MAS received its 75th delivery of a Boeing 737, with a “next-generation” 737-800.

The airline also aims to increase passenger loads on its routes to India by 15% in 2012, the international press reported in mid-August. MAS flies a total of 40 weekly flights to five cities in India from Kuala Lumpur. The airline is planning to increase frequencies to Mumbai (Bombay), Chennai (Madras) and Bengaluru (Bangalore) from September 1 to strengthen connectivity and provide more options for passengers on these routes.

MAS is targeting a return to profitability next year as efforts to strengthen its financial position seem to be paying off. The airline cut its losses in the second quarter of 2012 to RM348.7m ($112.44m), from RM525.8m ($169.55m) in the first quarter. It has been particularly successful in tackling fuel costs (which accounted for 37% of expenses in the period), reducing them by 18%. The airline said that foreign exchange losses of RM173m ($55.79m) contributed to its losses.

“The group’s aggressive focus to consolidate our network is helping the turnaround, as already showing in the improvement in yield and lower operating expenses, specifically spending on fuel,” said Ahmad Jauhari Yahya, the CEO of MAS.

The industry is also seeing increasing expansion via MAS’s budget rival, AirAsia. The airline, headquartered in Kuala Lumpur but with subsidiaries in Indonesia and Thailand, continues to grow. In July, it announced the purchase of Indonesia’s Batavia Air for $80m, its first major acquisition and a foray into the fast-growing Indonesian market.

The same month, AirAsia X, the carrier’s long-haul division, announced that it aimed to double flights to Australia from Kuala Lumpur, as it increases its fleet of twin-aisle Airbus A330s to 25 from the current 11. This will see the airline compete with MAS on Australian routes, as well as with Singapore Airlines’ new budget line Scoot and Jetstar, the low-cost subsidiary of Australia’s Qantas.

Earlier this year, AirAsia pulled out of a share swap deal with MAS, citing the latter’s problems with management and labour unions. The deal was intended to ease the rivalry between the two carriers, and lead to a degree of route consolidation, loosening the squeeze on profitability. While the agreement fell through, some feel the groundwork for greater cooperation has now been laid.

The suspended talks notwithstanding, Malaysia’s air transport segment is on the cusp of imminent expansion as a result of MAS’s entry into oneworld and increasing flight frequencies between Kuala Lumpur and other regional capitals.

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