BMI View: Malaysia's agribusiness is experiencing challenging times, as its most emblematic sector, the palm oil industry, is undermined by low prices and growing structural challenges. The cocoa sector is in an even worse position, as the country's grinding sector is facing stiff competition from Indonesia and lacklustre demand for cocoa globally.
The medium term outlook is brighter, amidst strong growth prospects in the poultry sector and opportunities for value added palm based oleochemical exports. Malaysia will have to remain ahead of its biggest competitor, Indonesia, in terms of product offering if it is to maintain its agribusiness sector afloat. As such, the next challenge for the country resides in the upcoming economic integration within the ASEAN region. The ASEAN Economic Community will present some opportunities, for example in terms of poultry exports. However, it also poses risks to the future of the sugar refining sector.
Palm oil production growth to 2018/19: 8.0% to 21.8mn tonnes. Growth will be supported as companies replant mature estates and yields improve on the back of better technology.
Sugar consumption growth to 2019: 13.7% to 1.8mn tonnes. The dominance and continued expansionary activities of market players F&N, Permanis and Yeo Hiap Seng have fuelled considerable growth in the Malaysian soft drinks sector, a significant factor fuelling demand for sugar.
Cocoa consumption growth to 2019: -1.1% to 257,000 tonnes. Cocoa processing in Malaysia is on the decline, due to the drop in domestic cocoa bean supply and increased grinding competition from Indonesia which has emerged as a leading processed cocoa exporter at the expense of Malaysia.
2016 BMI universe agribusiness market value: USD31.79bn, up 6.6% y-o-y, forecast to grow by 5.9% annually from 2015 to 2019.
2016 real GDP growth: 4.5% (down from 4.7% expected in 2015, forecast to average 4.6% from 2015 to 2019).
2016 consumer price inflation: 2.6% (down from 3.1% expected in 2015, forecast to average 2.4% from 2015 to 2019).
2016 Central Bank policy rate: 3.50% eop (up from 2.25% expected in 2015, forecast to average 3.45% from 2015 to 2019).
|Palm Oil, King Commodity|
|Malaysia - BMI Agribusiness Market Value By Commodity (% of total)|
|e/f = BMI estimate/forecast. Source: FAO, BMI|
After several years of strong production and earnings growth for palm oil producers, Malaysia's palm oil sector is going through challenging times. Palm oil prices will remain weak in the coming months, amidst oversupply, growing concern over the outlook for the global economy and the absence of a real El Nino-related impact on South East Asia's weather so far this year. Low prices are clearly undermining profitability in the sector. Moreover, structural challenges are growing in the industry. These include growing hurdles to plantation expansion, stagnating tree and milling yields, steady increase in production costs and low availability of labour.
After recording strong growth in cocoa grinding in the 2000s, processing in Malaysia has been on the decline over recent years, due to the drop in domestic cocoa bean supply and increased grinding competition from Indonesia which has emerged as a leading processed cocoa exporter at the expense of Malaysia. We forecast cocoa consumption to remain on its decline over the coming years.
Malaysia's sugar sector is undergoing changes, as the government is partially liberalising prices and has started easing restrictions on refined sugar imports. Sugar refiners in Malaysia are likely to benefit from low raw sugar prices over 2015, however, challenges are mounting for the sector amidst growing competition from smuggled refined sugar products from Thailand, as well as from the decrease in limits over refined sugar imports. Moreover, the local sector offers limited opportunities as sugar consumption in the country has peaked. The upcoming implementation of a Goods and Services Tax (GST) form April 2015 will also support sugar prices and limit consumption growth. In light of these challenges, local refiners are looking at investing in South East Asia to expand production and sales.