1



## Strategy for palm oil under 10**th** 

## 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 intheTenth 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 NKEAwill have specifictargets and concrete actionsto drive economicgrowth. Implementation of these actions will be monitored by the Economic Delivery Unitwiththe 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) in2

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 t** **he P** **alm 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 FFByield,which is currently at 21tonnes 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 dueto land limitations in Malaysia. There is currently atotal of 6.6 million hectares of landfor 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 asfatty 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 FFByield and OER is significant duetothe high level ofvariation 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 million3

additional hectares ofwhich 75 percent or 1 million hectares is located in Sarawak. Giventhis 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. Atthe moment, Malaysia hasyetto capturethefull 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 opposedto 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 industrygoing 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 morethan 100years 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 competingglobal 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;4

**• Excellent plant breeding activities** Malaysia is recognized worldwide for the quality of its planting material thanksto its 20 world

class 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 acrossthevalue chain from seed producersto 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 beengradually introduced over theyears, it hasyetto replacethe high labor requirements in the upstream sector. Wherever it is introduced, mechanization must meet the stringent criteria reducing laborcosts, 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 asGanoderma 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 ofthe industry’s GNI. Companies inthe industry have been slowto 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 protecttheir 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; and5

**• 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 acrossthe palm oil value to capturethe 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 orderto achievethis vision,we have identifiedtwostrategic thrustsforthe 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:6

**• 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 effluentwaste (POME) isgenerated. In orderto reducethe 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 dueto its high potential for global warming where it is over 20times more effective intrapping 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 tothe nationalgrid orfortheir own use. Mills should start developing biogas plants immediately to capture additional incomefromthe incentives offered bythe Clean Development Mechanism (CDM) program before it expires in 2012. Biogas plantswill be developed atthe 500 mills overthe next 10years. Ofthese, 250 millswilltargetto 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 burntas fuel. To accelerate the development of biogas plants, the electricity tariff for Renewable Energy Power PurchasingAgreement (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.7

**Funding** This EPP will be wholly funded by independent millers and plantation companies with atotal estimated cost of RM2.8 billion. The investment will be targeted at three major areas for the construction and operation of biogas plants: buildinggasflaringfacilities (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**