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Strategy for palm oil under 10th Malaysia Plan (2011-2015)

National Key Economic Areas (NKEA)

During the Tenth Plan period, Malaysia will focus its economic growth efforts on NKEAs. An NKEA is 

defined as a driver of economic activity that has the potential to directly and materially contribute a 

quantifiable amount of economic growth to the Malaysian economy.

When countries transformed from middle to high income they have typically focused on a small number 

of sectors and geographies. Malaysia also needs to focus on a limited number of sectors and 

geographies in order to achieve the goal of becoming a high income nation.

The economic reform measures in the Tenth Malaysia Plan such as modernizing of business regulations, 

human capital development, increasing domestic competition, removing market distortions and 

improving infrastructure will provide the enabling ecosystem for NKEAs.

The NKEAs were chosen on the basis of their contribution to high income, sustainability and 

inclusiveness. An initial set of 12 potential NKEAs have been identified comprising 11 sectors and one 

geographic area - Kuala Lumpur. Kuala Lumpur was chosen because it accounts for almost one-third of 

Malaysia’s total GDP and urban agglomeration can be a major driver of economic growth.

Each NKEA will have specific targets and concrete actions to drive economic growth. Implementation of 

these actions will be monitored by the Economic Delivery Unit with the Prime Minister providing overall 

leadership. The NKEAs are:

1. Oil and gas;

2. Palm oil and related products;

3. Financial services;

4. Wholesale and retail;

5. Tourism;

6. Information and communications technology;

7. Education;

8. Electrical and electronics;

9. Business services;

10. Private healthcare;

11. Agriculture; and

12. Greater Kuala Lumpur

2) Palm oil and related products

Malaysia’s palm oil industry is the fourth largest contributor to the national economy and currently 

accounts for RM1,889 (8 percent) of the national GNI per capita. The industry spans the entire value

chain from plantations to downstream activities. Its development is mainly private sector-driven and is 

still heavily skewed towards upstream activities, namely production of fresh fruit bunches (FFB) in 
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plantations, processing of FFBs in mills and palm kernel crushing and palm oil refining activities. While 

Government support is primarily targeted at promoting downstream activities and supporting 

independent smallholders, the core focus of the Palm Oil National Key Economic Area (NKEA) is to 

reinforce the leading role of the private sector in steering the palm oil industry.

Definition of the Palm Oil NKEA

The palm oil industry in Malaysia is organized around four segments. The plantations segment includes

seed nursery, planting, harvesting, collecting and milling. The second segment includes refining, bulking

and trading activities. The remaining two downstream segments are non-food downstream as well as 

food and health-based downstream.

As of 2009, Malaysia has 4.7 million hectares of oil palm plantations, 416 mills, 43 crushers, 51 

refineries, 18 oleochemical plants and 25 biodiesel plants. The industry is dominated by large plantation 

companies (private- and government-linked companies) which hold 60 percent of total plantation land, 

with a growing level of integration along the value chain. However, there is a significant share of palm oil 

plantation area under the ownership of organized smallholders and independent smallholders, which 

still account for 28 percent and 12 percent of the total area respectively.

The palm oil industry is forecasted to grow by 7.1 percent over the next 10 years, driven by the following 

factors:

• Further gains in average productivity of FFB yield, which is currently at 21 tonnes per hectare 

per year, and of the oil extraction rate (OER), which is currently at 20.5 percent;

• New plantation expansion of Malaysian companies abroad due to land limitations in Malaysia. 

There is currently a total of 6.6 million hectares of land for agricultural use in Malaysia, of which 

4.7 million hectares (71 percent of total) is used for oil palm plantations; and

• The venture of large plantation companies into high potential downstream activities such as 

processed food, biodiesel, second generation biofuel, and oleochemicals (chemicals derived

from palm oil such as fatty acids, fatty alcohol, soap noodles, methyl ester and glycerine).

Productivity gains in the palm oil industry have a significant impact on GNI growth. The growth potential

in both FFB yield and OER is significant due to the high level of variation in performance between large,

medium, small plantations and smallholders as well as mills across Malaysia. Evidence collected from 

high performing plantation companies suggest that best practices are in place and can be shared to 

bridge the gaps resulting in higher yields and OER across the nation.

With 4.7 million hectares already in use for oil palm cultivation in Malaysia, the potential for further

national expansion is limited. The expansion potential is estimated at a maximum of 1.3 million 
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additional hectares of which 75 percent or 1 million hectares is located in Sarawak. Given this situation, 

large Malaysian companies are redirecting their efforts and resources towards international expansion. 

As of 2009, Malaysian companies own about 25 percent of total palm oil plantations in Indonesia. 

Although Indonesia remains the natural choice for the expansion of Malaysian plantations, some 

companies have recently shown interest in other parts of Asia as well as Africa and South America.

At the moment, Malaysia has yet to capture the full potential of existing downstream opportunities. As 

an illustration of this untapped downstream potential, for exports as of 2009, only 18.5 percent of

Malaysia’s palm oil output is exported as downstream products as opposed to 81.5 percent exported as

upstream products either in crude form (e.g. palm oil, palm kernel oil and palm kernel cake) or 

processed form (e.g. crude palm olein, Refined Bleached Deodorised-RBD palm oil, RBD palm olein, RBD 

palm stearin and palm fatty acid distillate). The clear identification of high potential downstream 

applications and commitment of companies in the industry to further integrate and invest resources in 

downstream segments or in research and development (R&D) is important to ensure the sustainability 

of the industry going forward.

MARKET ASSESSMENT

Oil palm is one of the main drivers of Malaysia’s agriculture sector, accounting for 71 percent of its 

national agricultural land bank. The industry’s history spans across more than 100 years during which it 

has achieved tremendous success. Building on a series of core advantages, the industry will remain a 

major contributor to the Malaysian economy over the next 10 years.

Firstly, the palm oil industry holds two core advantages over other substitutes:

• Rising relative demand versus substitutes

The global demand for oil and fats, such as palm oil, soyabean oil, sunflower oil and rapeseed oil 

rose sharply at an average growth rate of 7 percent over the past ten years, driven by increasing 

global population, rising per capita incomes and changing dietary habits. Comparatively, over 

the same period, palm oil demand alone has grown at a 10 percent rate with the highest growth 

coming from Russia (22 percent), the USA (21 percent), China (16 percent) and Europe (9 

percent); and

• High oil yield per hectare versus substitutes

Oil palm produces 4 to 5 tonnes of oil per hectare which is 8 to 10 times higher than other oil 

seeds such as rapeseed and soyabean.

Secondly, within the palm oil industry, Malaysian palm oil has three major strengths compared to 

competing global producers:

• National FFB yield levels

Malaysia has amongst the highest average palm oil yields at about 21 tonnes per hectare per 

year. Its most direct competitor, Indonesia, holds a national average yield of 19 tonnes per 

hectare per year;
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• Excellent plant breeding activities

Malaysia is recognized worldwide for the quality of its planting material thanks to its 20 worldclass seed producers and annual production capacity of 87 million seeds and its leading R&D 

activities such as research into the oil palm genome, tissue culture and biotechnology; and

• Conducive regulatory environment:

Malaysia’s palm oil industry is regulated by Malaysian Palm Oil Board (MPOB), which awards 

licenses across the value chain from seed producers to export of palm oil as well as developing 

policies, guidelines and practices to help monitor and assist the industry.

Despite these developments, the industry is facing a series of hurdles, which threaten the country’s 

standing as a competitive global palm oil producer. These hurdles include:

• Limited land bank

Malaysia can only count on a maximum potential increase of 28 percent of its oil palm 

plantation area, and mostly on hilly or peat terrains. As a result, Malaysia has been gradually 

losing its global production market share to Indonesia. Indonesia overtook Malaysia in crude 

palm oil (CPO) production market share in 2009 and now holds 46 percent of the global 

production market share compared to Malaysia’s 41 percent. Indonesia’s high growth of new oil 

palm plantations coupled with its lower average cost of production has directly impacted 

Malaysia’s market share in key export markets such as India, Pakistan and China;

• Limited scope of mechanization

With 369,000 foreign workers employed in plantations, the oil palm industry is still heavily 

dependent on foreign labor for harvesting, general upkeep and maintenance. Although 

mechanization has been gradually introduced over the years, it has yet to replace the high labor

requirements in the upstream sector. Wherever it is introduced, mechanization must meet the 

stringent criteria reducing labor costs, increasing productivity and improving product quality. For 

this reason, one of the key challenges of the plantation segment is to scale up its level of 

mechanization;

• Threat to plant protection

Pests and diseases such as Ganoderma Basal Stem Rot, are increasingly becoming a threat to the 

industry. Although research relating to the biology, early detection and control of such disease 

has been undertaken, a long-term sustainable, cost-efficient and effective solution is still not 

available;

• Reliance on upstream

The palm oil industry is still heavily skewed towards the upstream segment, which in 2009 

generated 87 percent of the industry’s GNI. Companies in the industry have been slow to move 

downstream, where high value-add is still to be captured, in any significant number;

• Impediments to market access

Countries are using both tariff- and non-tariff barriers to restrict market access to protect their 

local oils and fats industry. The Renewable Energy Directive adopted by the European Union, 

which imposes strict regulations on carbon emissions distorting the palm oil commodity price, is 

an example of such a barrier; and
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• Environmental and sustainability concerns

A continued slew of anti-palm oil campaigns highlighting its carbon footprint or raising health 

concerns, launched by environmental and consumer advocacy groups in Europe and the USA, 

have generated an increasing unwarranted negative perception of palm oil. Such campaigns 

include that launched by lobby group claiming that palm oil saturated fat raises blood 

cholesterol levels, leading to heart disease.

TARGETS AND ASPIRATIONS

We aim to raise the industry’s GNI contribution from a current RM52.7 billion to RM178.0 billion by 

2020. We plan to bridge this GNI gap through the implementation of eight core entry point projects 

(EPP) spanning across the palm oil value to capture the fast-growing global demand for palm oil, which

registered a growth rate of 10 percent between 2000 and 2009. The EPPs will generate RM47.1 billion in 

GNI impact in 2020, and the business opportunities will add another RM74.6 billion (inclusive of baseline 

growth of RM17.0 billion). The incremental GNI also includes RM3.6 billion from the multiplier effect 

created by EPPs from other sectors. The largest source of the multiplier effect on the Palm Oil NKEA is 

from the Wholesale and Retail as well as the Electrical and Electronics NKEAs. This includes benefits such 

as increased retail activity reflecting increased demand for palm oil and palm oil-based products.

With the implementation of the EPPs, the average salary of 161,000 low-income independent 

smallholders will significantly improve by 47 percent in 2020. In addition, we will reduce our 

dependence on foreign labor by 15 to 20 percent as a result of major gains in worker productivity in 

plantations. These EPPs will also create 41,600 new local jobs upstream and 81,800 additional jobs 

downstream, of which 40 percent will be high-skilled jobs earning an average monthly income of 

RM6,000. Additionally, we will reduce 110,000 upstream foreign workers.

8 EPPs Identified to Grow Incremental GNI of RM47.1 billion

In order to achieve this vision, we have identified two strategic thrusts for the palm oil industry. Aligned

against each strategic thrust, we have identified a portfolio of EPPs to grow the industry’s GNI 

contribution.

Upstream productivity and sustainability

Five EPPs will focus on improving upstream productivity generating an incremental GNI of RM33.1 

billion in 2020. The implementation of these EPPs will transform Malaysia’s oil palm industry, resulting 

in significant productivity improvement (from 21 to 26.2 tonnes per hectare per year). These EPPs are:

• EPP 1: Accelerating the replanting of oil palm;

• EPP 2: Improving fresh fruit bunch yield;

• EPP 3: Improving worker productivity;

• EPP 4: Increasing the oil extraction rate; and

• EPP 5: Developing biogas at palm oil mills.

Downstream expansion and sustainability

The three EPPs focusing on downstream expansion are targeted to generate an incremental GNI of

RM14.0 billion by 2020. These initiatives will involve coordinating public-private R&D efforts with a

strong commercialization focus. As a result we are expecting a rising income from downstream 

products, which will constitute at least 25 percent of total palm oil income. These EPPs are:
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• EPP 6: Developing oleo derivatives;

• EPP 7: Commercializing second generation biofuels; and

• EPP 8: Expediting growth in food- and health-based downstream segments.

Summary of EPP 5: Developing Biogas at Palm Oil Mills

Rationale

When FFB is processed, palm oil mill effluent waste (POME) is generated. In order to reduce the impact 

to the environment, the POME is treated before being discharged. It consists of several steps including 

cooling, oil removal, anaerobic and aerobic treatment (to reduce Biochemical Oxygen Demand (BOD) 

and Chemical Oxygen Demand (COD) to a level acceptable for irrigation or land application). The 

anaerobic decay of organic matter inside the ponds is accompanied by the production of biogas 

containing methane (which is a principal component of natural gas) that is released into the 

atmosphere.

This methane gas released during the milling process has given the palm oil industry a negative image

due to its high potential for global warming where it is over 20 times more effective in trapping heat in 

the atmosphere than carbon dioxide over a 100-year period. As methane gas could be captured to 

generate electricity, mills can benefit from this new revenue source as well as from the carbon credit 

program offered under the United Nations Framework for Climate Change Convention (UNFCCC). As of 

today, only 12 mills in Malaysia have embarked on the development of biogas plants under CDM 

projects.

Actions

The objective of this initiative is to ensure that mills capture methane gas to generate electricity for 

supply to the national grid or for their own use. Mills should start developing biogas plants immediately 

to capture additional income from the incentives offered by the Clean Development Mechanism (CDM) 

program before it expires in 2012.

Biogas plants will be developed at the 500 mills over the next 10 years. Of these, 250 mills will target to

supply electricity to the national grid by 2020. Another 233 mills will capture biogas to be used as fuel

for their own boilers. The balance of 17 mills will use the methane gas for both options. The 

development of biogas plants will also enable mills to gain another revenue source from the sale of palm 

kernel shells, previously burnt as fuel.

To accelerate the development of biogas plants, the electricity tariff for Renewable Energy Power 

Purchasing Agreement (REPPA) must be increased from the current RM0.21 per kilowatt hour to RM0.35 

per kilowatt hour. To assist independent millers in funding the development of their biogas plants, an 

existing Green Technology Fund set up by the Ministry of Energy, Green Technology and Water is 

available.
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Funding

This EPP will be wholly funded by independent millers and plantation companies with a total estimated 

cost of RM2.8 billion. The investment will be targeted at three major areas for the construction and 

operation of biogas plants: building gas flaring facilities (worth RM1.7 billion), investing in connection of 

mills to the grid (worth RM845 million) and investing in gas burners (worth RM259 million).

Impact

This EPP will generate an estimated RM2.9 billion in GNI in 2020 while creating 2,000 jobs and not

requiring any incremental Government funding.

Details of EPP5 - See Attached Document