Chapter 1: Introduction

1.0 Overview

Nowdays, as we know that palm oil is one of the world's most produced and consumed
oils. Palm Oil are cheap, production-efficient and highly stable oil is used in a wide variety of
food, cosmetic and hygiene products, and can be used as source for bio-fuel or biodiesel. Most
palm oil is produced in Asia, Africa and South America because the trees need warm
temperatures, sunshine and plenty of rain in order to maximize production.

Source: The Oil Palm Org (2008)

Figure 1.0: Palm oil cultivated countries

Moreover, there has the negative and positive impact of the palm oil production. Apart from its
impact on people's health due to the high level of saturated fat, the palm oil business is a key
driver for deforestation in countries such as Indonesia and Malaysia. Indonesia is the largest
greenhouse gas emitter after China and the United States. In addition, oil palm was cultivated in
43 countries throughout the World as shown in figure 1.0. The countries that have allocated more
than 1 million hectares of land to oil palm tree are Indonesia, Malaysia, and Nigeria, with
respective allocations of 5 million hectares, 4 million hectares and 3 million hectares out of the
total 14.4 million hectares of land allocated to oil palm trees worldwide. This was the survey that
carry out in year 2008 by Mr. Koh and Mr. Wilcove.

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 Estimated Palm Oil Production in 2014
35,000,000

30,000,000

25,000,000
19,800,000
20,000,000

15,000,000

10,000,000

5,000,000

0 2,000,000 1,108,000 930,000

33,000,000
Indonesia Malaysia Thailand Colombia Nigeria

Production of Palm Oil in T

Source: Index Mundi (2014)

Figure 1.1: Comparison between Malaysia & Other Palm Oil Producers in 2014

Furthermore, nowadays, global palm oil production is dominated by Indonesia and Malaysia.
These two countries together account for around 85 to 90 percent of total global palm oil
production. Indonesia is currently the largest producer and exporter of palm oil worldwide.
While, Malaysia is the worlds second-largest producer of the commodity after Indonesia. The
figure 1.1 bar graph shown the recent production value in 2014 over top 5 country.

Palm oil is extracted from the flesh of the palm fruit, which is primarily found in the tropical
climate of Africa, South America and South East Asia. It is estimated that about 90 percent of
palm oil is used for food consumption, whereas industrial consumption such as cosmetic
products or fuel and diesel claim the remaining 10 percent.

Futhermore, palm nuts are not genetically modified like other oil crops such as soybean. This
feature makes palm oil easily tradable to regions that have banned the import of GMOs,
providing a natural marketing niche for palm oil exporting countries.

2
In addition, due to low mechanization possibilities, large oil palm plantations are labor intensive
and generate up to 30 times more employment per unit area than other large-scale farming,
including rubber, sorghum, and soybeans.

Global consumption of vegetable oils from 1995/1996 to 2014/2015, by oil type (in million metric tons)
200
180
160 23.57
23.48
23.19 15.18
22.78 14.57
140 21.95
13.21
12.96
120
2020.5
20.911.75 25.6327
19.8 10.6 23.72
23.68
100 9.4 23.27
9.810.318.320.1
World Consupmtion in million metric tons 80 16.9 17.6 46.79
45.35
42.59
42.22
40.74
60 16.4 35.637.536
8.633.6
40 11.2
60.73
57.31
54.98
20 19.735.337.739.442.147.63
50.16
15.8
0

Palm Oil Soybean oil Canola oil

Sunflowerseed oil Others

Source:
US Department of Agriculture ( Statista 2015)

Figure 1.2: Global consumption of vegetable oils from 1995/1996 to 2014/2015

This statistic shows the global consumption of vegetable oils from 1995/1996 to 2014/2015, by
oil type. Vegetable oils are oils or fats extracted from a plant. Their texture can be described as
liquid, oily and fatty. Most vegetable oils are able to fulfill two functions: they can either be used
as cooking oil or for fuel and diesel production. The most common oil types include palm oil,
soybean oil, canola oil and sunflowerseed oil.

Besides, palm oil have comparative advantage as compare to the others vegestable oil. For
instance, unlike others vegetable oil, palm oil requires little or no hydrogenation to solidify CPO

3
for making products such as margarine, bakery shortenings, and confectionery fats. This further
reduces the processing cost associated with moving palm oil up the supply chain.

Lastly, from the comparative benefit and the statiscal shown. Palm oil had shown the high
efficientcy and its significant in helping Malaysia economic growth. Also, the statiscal had
reflect that Palm oil were the strongest demand for global consumption of vegestable oil as it
increases in every years.

1.2 Objective

1. To understand the origin of the palm oil.

2. To understand how the palm oil process in upstream and downstream.

3. To understand the Malaysia palm oil policy, goverment agencies and industries.

4. Palm oil contribution in Malaysia Economy.

5. To determine why Malaysia palm oil price keep dropping.

6. To determine the limitation of the palm oil.

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Chapter 2: Background of Palm Oil Industry
2.0 Origin of Palm Oil

Source: Google Image (2015)

Figure 2.0: Palm oil and Oil palm tree

The Oil Palm (Elaeis guineensis) originated from West Africa. The evidence of human use of
palm oil as a staple food crop may date as far back as five thousand years ago. The earliest
archaeological evidence on palm oil consumption was found in an Egyptian tomb in Abydos. As

5
no palm oil was produced in the country, the evidence implied that the oil had been traded during
the time of the Pharaohs, which are five thousand years ago. Needless to say, the oil palm origins
in West Africa and evidence of consumption in Egypt. Palm oil can be considered as one of the
earliest traded commodities.

Besides, palm oil was omnipresent in West Africa, the use of the palm oil play as an important
role in the international market it help the British Industrial Revolution. Movever, it results in the
expansion of oversea trade and this help grown of economic in the West Africa. From candle-
making to industrial lubricants, palm oil was a driving force behind the expansion of industrial
production, while nutrient rich red palm oil became a vital asset on long sea-faring voyages. As
the result, this increases the demand of using the palm oil. Europeans cast a huge amount of cash
and invested in the palm oil production, first in West Africa and expanding to Southeast Asia.

Futhermore, the combination of European settlers and entrepreneurs, they seeing the opportunity
of the commercial palm oil production to produce the soaps, food, cooking oil and etc. They start
to expand the oil palm plantations throughout Sub-Saharan Africa and Southeast Asia such like
Malaysia, Indonesia and Thailand. In year 1917, the first commercial scale plantation was
founded in Malaysia and it was established in Tennamaran Estate in Selangor.

The palm oil industry in Malaysia has evolved dramatically since the first commercial planting
took place in Tennamaran Estate in Selangor in 1917, laying the foundations for the industry in
Malaysia. The cultivation of oil palm increased at a fast pace in early 1960s under the
governments agricultural diversification programme, which was introduced to reduce the
countrys economic dependence on rubber and tin.

In the 1960s, the government introduced land settlement schemes for planting oil palm as a
means to eradicate poverty for the landless farmers and smallholders. Development of the
industry has been central to increased prosperity and societal advancement throughout the
country, from the rural communities that rely on employment from the plantations, to the
downstream industries that extend to city centers and export zones.

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Today, the industry directly employs more than 570,000 people, and contributed US$21.09
billion to Malaysias exports. More than 39 percent of oil palm plantations are owned by small
land holders, and has contributed to one of the largest poverty alleviation projects in the world
through the Federal Land and Development Authority (FELDA).

2.1 Palm oil value chain and applications

Palm oil value chain is set of activities in palm oil sector that provide product and service to
market. Palm oil value chain divide the process of produce product of palm oil into a system and
subsystem. As an oil and gas industry, palm oil sector also divide into three major sector:
upstream, midstream, and downstream. For palm oil sector consumer product also an important
sector. Table 2.1 below, beriefly shown the activities and product of each major sector of palm
oil.

Table 2.1: Activities and product of each major sector of palm oil
Upstream Midstream Downstream Consumer Products
ACTIVITIES Seed production Trading & Refining Packaging and
Nursery Fractionation
marketing branding
Cultivation Crude palm oil Oleochemicals Food products
Harvesting Esterification Non-food
Milling bulking Refined product
product
storage
PRODUCTS DXP seeds Crude palm oil RBD palm oil Cooking oil,
Crude palm Palm fatty acid
(Calix) frying fats
Fresh fruit kernel oil distillate Margarine
Palm kernel RBD palm olein Shortening
bunches
Crude palm oil RBD palm stearin Vitamin E
cake
Palm kernel RBD PK olein
supplements
Biomass RBD PK stearin Milk fat
(Empty Fruit Cocoa butter
replacements
Bunches, Kernel equivalent Bakery fats
Cocoa butter

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 shell, fronds) substitute Confectionery
Palm oil mill Cocoa butter
fats
effluent replacers Biodiesel
Fatty acid, Vegetable ghee
alcohols Guava
Glycerines puree/juice
Palm methyl Biodiesel
esters Animal feed
Tocotrienol Candles, soap
Source: SimDarby

Palm oil is attractive to the food industry because it is cheap and is semi-solid at room
temperature. It can be used as a household cooking oil, but United States used it as an ingredient
in commercial processed foods. For instance, chocolate products such as candy bars and cake
icing may contain palm oil as a substitute for cocoa butter. Ice cream, margarine, peanut butter,
coffee whitener, canned cream soups, sauces, baked goods, trail mix and other snack foods, and
microwaveable convenience foods may all contain palm oil. Palm oil also has industrial and
chemical uses, for examples it can replace mineral oil for producing detergents, soap, lubricants,
cosmetics and etc.

Besides that, the oil palm fruit also provide palm kernel oil and palm kernel meal. These product
are derived from the seed rather than from the fleshy pulp. The seeds are small in size and can be
stored for a long time and easy to be transported. Palm kernel meal is an important ingredient in
animal feeds. While, palm kernel oil is used in some of the same kind of food as palm oil even
though their fatty acid compositions greatly differ.

Apart from that, the oil palm has been a useful tool for economic growth. Palm oil production
and processing has become a growth industry and a valued source of export earnings for
Malaysia. For other nations, it provides a source of economical food imports.

The importance of the palm oil trade to the Malaysian economy was confirmed with the
founding of the Kuala Lumpur Stock Exchange (KLCE) for price setting, safeguard and promote
market information to reduce market risk in the trading of palm oil.

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In addition, growing world population and wealth have caused the global demand for food to
explode. As part of this wide development, the demand for edible oils and fats has risen. Palm oil
has now replaced soybeans as the worlds biggest source of edible oils and fats.

Lastly, palm oil is now starting to be used as an ingredient in bio-diesel and as a fuel to be burnt
in power stations to produce electricity. This is a new market for palm oil which has the potential
to dramatically increase global demand for this commodity.

2.2 Upstream

The upstream of palm oil value chain involves in the activities of producing the raw material:
fresh fruit bunches (FFB), crude palm oil (CPO), and palm kernel oil (PKO). The production of
FFB involvesthe seeding production, nursery, cultivation, and harvesting. Then, the production
CPO and PKO are involves in milling process of harvested FFB. Biomass likes: empty fruit
bunches, kernel shell, fronds, and palm oil mill effluent are also produced during the milling
process.

During the seed production, research has been done to obtain more efficiency oil palm seed likes:
DXP seed to product more and better quality FFB that can produce high quality CPO and PK.
The cultivation of oil palm start with the nursery, followed up by site preparation, and the
establishment and maintenance of field.

Firstly, for nursery, DXP oil palm seeds is being germinated then planted in polybags for about
12 months. There are three basic element of nursery: enoughtop soil, continuous water supply,
and irrigation. Good nursery skill of adequate watering, weeding, applying of fertilisers and
removing of bad seedlings are essential for the production of high quality oil palm seedlings.

Secondly, site preparation start with land clearing, cleaning exist forest and plants followed by
the planting of cover crops, and the establishment of road and effective drainage system.
Leguminous is a common type of cover crops that provide many advantages. It able to prevent
soil erosion, improve soil structure and palm root development. The establishment of road is

9
important for transport and future development. Movever, the establishment of drainage system
field used to provide good nursery and maintenance.

Thirdly, field establishment start with lining, holing and planting of polybag oil palm seedlings at
density of 136 to 148 palms per ha, depending on the soil type. It is important to full cover the
field with leguminous cover crops.

Lastly, field maintenance works such as weeding, watering, pruning, pest and disease
management and applying of fertilisers. This maintenance will continues for 20-30 years until
replant as it is the productive time of oil palm. After planting 24 to 30 months, the FFB will be
harvested for milling process. The flow chart of palm oil milling process will shown in next
page.

2.3 Palm oil milling process

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 Figure 2.3.1: Palm Oil Processing Unit Operations

Firstly, the fresh fruit delivered to manufacturing industry, emptied into a large wooden
boxes for weighing on a scale so that the quantities of fruit may be checked at the processing
site. A large installations use weighbridges to weigh materials in trucks. The quality standard

11
achieved is dependent on the quality of the bunch arriving at the mill. The sterilization would be
operated after bunch reception, using high-temperature to cook the soft fruit bunches and
sterilization, to soften the pulp structure, making it more easily separate the core-shell during the
digestion process and preventing enzymatic decomposition and also avoid elevated levels of free
fatty acids. High pressure steam is used for sterilization, expand humidify, reduced the
contraction of the nuts may leads to the kernel detached from the shell wall and loosening the
kernels within their shells.

Secondly, Threshing step, palm oil bunches would be classified by a strong vibrations
through the fruit from fruit bunches separated. And a Crusher divided fruit core into palm kernel
and shell after separated with fibre. Air separation and washing systems is carried out for
separate the palm kernels and shells. Shells enters boiler system as fuel source, and palm kernels
are storage after drying. Then, digestion step, it is the process of releasing the palm oil in the fruit
through the breaking down of oil-bearing cells, to reducing the viscosity of the oil, destroy the
fruits outer covering (exocarp), and to break oily cells. Next, Pressing is made after the material
leaves the digestion vessel. There are two aspects of extracting oil from the digested material.
One is uses mechanical system presses the oil is called the dry method. The other system is
called the wet method which is uses hot water to leach out the oil. In the dry method the
objective of the extraction stage is squeezing the oil out of a mixture of oil, moisture, fibre and
nuts by using mechanical pressure on the digested mash.

Clarification is the process of separate the oil from its entrained impurities such as water,
cell debris and non-oily solid. So, the machine-pressed is applied, the crude oil first diluted
with water washing, through settlement and filtration, removing all the impurities material from
the oil, then the process is continuously, the whole divided into two parts: oil and sediment. Oil
storage is the final steps, all the purified and dried palm oil would be transferred into a tank for
storage prior to dispatch from the mill.

2.4 Downstream

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 Downstream activities in the production of palm oil include the refining and fractionation
of CPO, the palm kernel crushing, the manufacture of palm oil based edible and non-edible
products, the manufacture of oleochemical products.

The refining process removes free fatty acids, phosphatides, odoriferous matter, water as well as
impurities such as dirt and traces of metals from the CPO. The objective being to produce an
edible oil of consistent quality that meets industrys standards and satisfies customer
requirements particularly in respect of free fatty acids FFA, moisture and impurities, Iodine
Value, Peroxide Value, melting point, colour and flavour. The refined oil must tasteless and have
a bland flavour.

Beside, CPO is processed by either physical or chemical refining to obtain Refined Bleached
Deodorized Palm Oil (RBDPO) and Neutralized Bleached Deodorized Palm Oil (NBDPO). Palm
Kernel Oil (PKO) undergoes similar refining processes to become physical refined, Refined
Bleached Deodorized Palm Kernel Oil (RBDPKO) or chemical neutralised, Neutralized
Bleached Deodorized Palm Oil (NBDPKO).

Furthermore, among the two processes, physical refining is the predominant approach adopted
by the refineries as it is simpler, less capital intensive, more efficient and produces a lower
effluent load. The flow chart and table of decrbing the physical and chemical refining process are
show in the next two page.

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Figure 2.4: Refining process of CPO

14
Table 2.4: Physical and Chemical refining

Process Physical refining Chemical refining

Degumming/ Treated with food grade phosphoric FFA present in CPO is removed by
Neutralisation acid or citric acid to remove natural neutralisation with caustic soda
gums in the form of phosphatides (sodium hydroxide) and produces a
soap stock
Earth Bleaching Bleaching with activated earth (Fullers Subjected to earth bleaching to
Earth) under vacuum to remove remove colour pigments and metal
colouring matters as well as to adsorb ions.
any metal ions.
Deodorising Heated to 240 C - 260 C under 2-6 mm Hg
Bleached Steam distillation process also removes Steam distillation under vacuum to
Deodorised PO odours and off-flavors from the CPO remove odoriferous matters such as
aldehydes and ketones
Fractionation The palm oil fractioning process involves TWO main steps:
CRYSTALLIZATION and FILTRATION. During crystallization, the palm oils
triglycerides melt at different temperatures, fractioning the oil into liquid and
solid components. The character of the crystals produced depends on the
temperature, time and agitation used during the process. The fractioned palm oil
then passes through a filtration process, dividing the oil into liquid palm olein
and solid palm stearin components. For example, RBD Strearin, NBD Strearin
and etc.

2.5 Palm Oil Industry in Malaysia

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2.5.1 Policy
2.5.1.1 Industrial Master Plan 1 & 2

The First Industrial Master plan (1985-1995) was initiated to provide a medium- and long-term
policy framework to spearhead the development of a more diversified and integrated
manufacturing sector. The basic thrust of the first industrial Master plan were outward-oriented
industrialization of the industrial structure. However, the second industrial Master plan (1996-
present) is to transform the manufacturing sector into a resilient, broad-based and international
competitiveness sector. The main objectives is to accelerate the growth of the manufacturing
sector and promote opportunities for the maximum and efficient use of the nations abundantly
endowed natural resources such as palm oil, rubber and cocoa. Those strategy is to be supported
by technology, manpower development, infrastructure, and tax and regulatory agencies.

Table 2.5.1.1:

Industrial Master plan 1 (1985-1995) Industrial Master Plan 2 (1996-present)

Area Peninsular Malaysia East Malaysia
focus Call for development of different Call for productivity gains
segments of the industry in the Encouraged Malaysia to seek raw
value chain especially materials from abroad
oleochemicals
Human Training institutes, universities Training focused on downstream
Resources On the job training products.
Training of R&D personnel.
Overseas training.
Technology Adapt process and R&D technology Localisation of machinery &
from PORIM equipment production.
Local fabrication - Reduce downtime and costs from
freight and exchange rate fluctuations.
Infrastructure Rationalisation of palm oil refining Expansion of bulking, onshore
and fractionation. pumping, storage and handling
- To increase efficiency and facilities in East Malaysia.
competitiveness in world markets.
Tax&regulato Government incentives Market coordinated incentives.
ry agencies - Double deduction tax benefit on
export sales.
- Export tax on CPO to reduce
supplies to destination refineries in
Europe.
Source: MPOC Publications

2.5.1.2 Wildlife Policies

16
 The Government of Malaysia has also been a long-time supporter of wildlife
conservation, consistently passing legislation that ensures the protection of critical wildlife. As
early as 1976, the Third Malaysia Plan established 15 conservation areas covering over 5,600
km. Conservation efforts have consistently increased since, with stronger regulations governing
industries and a consistent focus on sustainable development.

The Government, and specifically the Department of Wildlife and National Parks, supports a
number of programs to maintain and improve conservation areas and the protection of critical
species, such as rehabilitating preserves and enforcing conservation laws. These efforts are
funded, in part, by the palm oil industry.

The Wildlife Conservation Act of 2010 has increased penalties against poaching and illegal
killings and established a robust legal framework within which Malaysia can protect biodiversity
and support individual conservation efforts.

Malaysia is also an active participant in international conservation organizations and forums,

including the Convention on Biological Diversity where it promotes sustainable development
and biological conservation.

2.5.2 Government Agencies

2.5.2.1 Federal Land Development Agency (FELDA)

17
 Federal Land Development Authority (FELDA) was
established on July 1, 1956 under the Land Development
Ordinance of 1956 for the development of land and relocation
with the objective of poverty eradication through the cultivation
of oil palm and rubber. The FELDA function is to carry out
Source: FELDA (Website) projects of land development
Figure 2.5.2.1: FELDA and agricultural activities,
industrial and commercial social economy.

In 1990, FELDA was no longer recruiting new settlers. Government has entrusted FELDA to
stand with their own financial and become a statutory body that can generate their own income to
support various development through a variety of businesses. Consequently, from 1994 onwards
the government does not channel any provision to the schemes. In an effort to generate income,
FELDA has launched a number of private corporate entities primarily to ensure complete value
chain of its core activities. Among the largest are FELDA Capital cooperative (Cooperative
FELDA), Felda Global Ventures (FGV) and Felda Investment Corporation (FIC). Beisdes, the
vision of the FELDA are to become the world leader of oil palm industry and settlers being part
of the middle income group.

Mission:
Enhance the well-being of citizens through the FELDA settlers:
1. Production of the best palm oil and rubber in the world.
2. Modern infrastructural facilities.
3. Increasing the potential the quality of human capital.
4. Creating a culture of innovation and creativity.
5. Diversify economic resources in order to generate high income.
6. Strengthen the management of FELDA to the world class.
7. Fostering a culture of excellence.

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2.5.2.2 Malaysian Palm Oil Board (MPOB)

Source: MPOB (Website)

Figure 2.5.2.2: Malaysian Palm Oil Board

MPOB is a government agency that established in 1998 with the passing of the Malaysian
Palm Oil Act, which led to the merger of two pre-existing agencies, the Palm Oil Research
Institute of Malaysia (PORIM) and the Palm Oil Registration and Licensing Authority (PORLA).
The resulting organization was named the Malaysian Palm Oil Board and officially began
operations in May 2000. The first Director-General of the MPOB was YusofBasiron who served
until 2006.

Futhermore, MPOB is a government agency responsible for the promotion and development of
the palm oil industry in Malaysia. The main role of MPOB is to promote and develop national
objectives, policies, and priorities for the wellbeing of the Malaysian oil palm industry.

On the same time, MPOBs vision is to become the premier Nobel Laureate - producing research
and development institution, providing leadership and impetus for the development of a highly
diversified, value-added, globally competitive and sustainable oil palm industry.

The mission of the MPOB is to enhance the well-being of Malaysias oil palm industry through
research, development and excellent services.

19
2.5.3 Plantation Company
2.5.3.1 Sime Darby

Source: SimeDarby (Website)

Figure 2.5.3.1: Sime Darby Plantation

Sime Darby Berhad is the one of the largest industry of palm oil in the world. This industry is a
public company that intergrated conglomerate in many types of business activities. However the
most important sector in this company is the oil palm plantation. Sime Darby was founded at
2007 and the headquarters set up in Kuala Lumpur, Malaysia. The main board is supported by
Flagship Subsidiary Boards.

The objectives of Sime Darby is used to strengthen the corporate governance continuously are to
boost integrity, transparency, accountability and responsibility. Next, to ensure that there is
constant checks and balance between the group and company divisions. Lastly is to practice
ethical business conduct behavior through the new Code of Business Conduct.

On the same time, the vision of Sime Darby is to lead the multinational corporation delivering
sustainable value to all stakeholders. While the mission is to develop an excellent portfolio of
sustainable business, to be better corporate governance with high ethical values, compete to issue
superior financial returns through operational excellence and high performance standards.

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2.5.3.2 Sarawak Plantation Berhad

Source: Sarawak Plantation Berhad (Website)

Figure 2.6.3.2: Sarawak Plantation Berhad

Sarawak Plantation Berhad (SPB) is one of the pioneer players in the oil palm industry in
Sarawak. The Groups land bank was reduced from 49,893 hectares (ha) to a current total of
41,324 ha principally due to rescission of two NCR (Native Customary Rights) joint venture
agreements covering an unplanted land size of 10,786 ha.

SPB, through its wholly owned subsidiary, Sarawak Plantation Agriculture Development Sdn
Bhd (SPAD), owns sixteen (16) oil palm estates with a total planted area of 31,266 ha as at 31
December 2013. Further, in response to the State Governments policy on NCR land
development, SPB, through its subsidiary, SPB PELITA Suai Sdn Bhd (SP Suai), has in the year
1999/2000 developed and fully planted 1,855 ha of NCR land in Sarawak with oil palms.

The core business activities of SPB Group are:

1. Development, cultivation and management of oil palm plantations on a large scale.

2. Milling of fresh fruit bunches (FFB) into crude palm oil (CPO) and palm kernel (PK).
3. Plantation management services.
4. Strategic investment to develop NCR land into oil palm plantations.
5. Operation of a seed production unit supplying high yielding seeds and seedlings.
6. Cattle integration.
7. Providing laboratory and technical services for the oil palm industry.

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2.5.4 Felda Global Ventures Holdings Berhad (FGV)

Source: Felda Global Ventures Holdings Berhad (Website)

Figure 2.6.6: FELDA Global Ventures

Felda Global Ventures Holdings Berhad (FGV) is a Malaysias leading global

agribusiness and is the worlds largest producer of crude palm oil (CPO). It operations in more
than 10 countries across Asia, North America and Europe.

Incorporated in Malaysia as a private limited company 2007, FGV initially operated as the
commercial arm of Federal Land Development Authority (FELDA). On 28 June 2012, the
company was listed on the main market of Bursa Malaysia Securities Berhad as Felda Global
Ventures Holdings Berhad. As at 31 December 2013 our market capitalisation is RM16.6 billion
FGV is the worlds largest Crude Palm Oil (CPO) producer and the second largest Malaysian
palm oil refiner. With more than 19,000 people in the group from our subsidiaries as well as
joint-venture companies and associates, we aspire to be one of the top 10 agri-business
conglomerate in the world by 2020. (Source: http://www.feldaglobal.com/our-company/about-
fgv/)

On the same time, the vision of the FGV is to be the leading globally diversified integrated agri-
business. While their mission is to be a global leader by creating value through our human
capital, championing out locally invested culture building an integrated value chain advantage
Cultivating diversification in commodities and geography.

Chapter 3: Contribution of Palm Oil in Malaysia

22
3.1 Economic Perspective
3.1.1 Palm oil Contribution Malaysia GDP

6.2
6
5.6
5
4.7
4
Gross DOmestic Product GDP %
3 GDP malaysia
2.3 Column2
2 2.1

1.3
1

0
2012 2013 2014

Year

Source: ..

Figure 3.1.1: .

From figure 3.1.1, we can see that the Malaysia Gross Domestic Product GDP from
year2012 is decreasing until year 2013 whereas from 2013 to 2014 the GDP of Malaysia is
increasing. That mean for increasing the Malaysia GDP it will improving global economic
condition and strong domestic activity. During the year 2013 the GDP in Malaysia in due to
the economic fluctuation and exchange rate fall so it make influence the GDP in the current
year. Therefore, due to the GDP increase in Malaysia it will benefit and improve Malaysian
living standard.

Besides, for the GDP agriculture also increase from year 2012 to 2014 is mean is help the
Malaysia raise the GDP and improve economic growth. Therefore, the growth in agriculture
sector improved to 2.3% is a higher production of palm oil.

3.1.2 Efficiency of Palm oil

23
 In this era, technologies developed are serving as general in this world. From year to
year, palm oil already takes a part as important in order to improve our economic activity and
developed in Malaysia. The oil palm is the most efficient oilseed crop in the work as it can
produce on average 10 tonnes of fruit per hectare and production of palm oil is a widely used
ingredient in the food and sell on the market.

Besides, as we know Malaysia palm oil become the top selling and also export to foreign
country in order to earn the profit to develop the country. Therefore, our governments always
improve the agriculture standard living by train them become professional in order to help the
Malaysia to sell the better quality on palm oil production and increase the productivity. Until
now, almost 70% economic growth is come from palm oil plantation. This is because our
governments are very focus on the palm oil Industry in order to achieve the vision 2020 and
become the highest salary country.

3.1.3 The important palm oil of economic growth

Palm oil is the one produce largest volume of vegetable oil in the world, accounting for
one-quarter of global consumption and approximately 60 per cent of international trade in palm
oil. Palm oil price and investment have a different structure than other vegetable oils. Therefore,
around 80% of all the palm oil is produced in Malaysia. Oil palms have an economic lifecycle of
20 to 25 years. The palm oil production is very inflexible and palm oil price can be volatile if the
palm oil age is getting bigger. However, palm oil produced in peninsular Malaysia as well as
Borneo. The total palm oil production in the country around 20million tons per year and around
16% of the palm oil is consumed directly in the country and another 84% will be consumed from
abroad customers. This is because Malaysia is depending on export palm oil in order to earn the
income for government Malaysia. Therefore, Malaysia is the second largest producer and
exporter of palm oil and Malaysia.

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3.1.4 Export

Export consumption
1.8 1.69
1.61 1.61 1.67
1.6 1.48 1.44 1.43
1.36 1.35 1.41
1.4 1.24 1.26
1.19 1.18 1.17
1.2
1 Year 2014
million 0.8 Series 3
0.6
0.4
0.2
0
Jan Feb
0.97 Mar Apr May Jun Jul Aug

Month

Sour
ce: .
Figure 3.1.2: .

From the figure 3.1.2 shows, the monthly tonnes export and import of Malaysia palm
oil. Since, government Malaysia not only focuses on export the palm oil to foreign country in
order to earn the profit improves economic growth. However, the figure clearly show out the
export palm oil if we compare the export from year 2014 and year 2015. The result will be
flexible and year 2015 is more productive than year 2014 year.

However, the palm oil during May 2015 year export suddenly increases to 1.6million tonnes
per month. This is because due to the quantity of demand on abroad customers increase so
that the export will be increase. Therefore, through the consumption of abroad customer
increase it may help Malaysia economic getting better and economic will grow faster.
Because, palm oil is one of major part to earn the revenue for government Malaysia in order
to improve the economic growth and will develop the country in future for long term period

3.1.5 Import

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 160000
142845
140000

120000
103496
101108
100000 89908

80000 75962
Quantity Number of import 63515 66006
60000
41574
40000

20000

0
Jan Feb Mar Apr May Jun Jul Aug

Monthly

Sour
ce: .
Figure 3.1.2: .

From the figure 3.1.2, we can see that the import of certain product or material always
fluctuation and no flexible this is because one of the reason due to the Malaysia currencies
dropping. So, Malaysia government will reduce to import certain product from outside
country. The reason why import important for palm oil industry is when producing the palm
oil need a certain product to help in manufacture the product. Therefore, after done for
manufacture product the palm oil is ready to sell and export to the foreign country.

3.2 Social Perspective

3.2.1 Contribution to Employment Growth

26
 1800 1694
1571 1615 1602
1600
1410
1400

1200

1000
Thousand 800

600

400

200

0
2009 2010 2011 2012 2013

Year

Source: .
Figure 3.2.1: .
From figure 4.1 shows that the palm oil contribution to employment in Malaysia is keep
increasing year to year whereas, only during year 2011 the employment is slightly decrease due
to the economic fluctuation so that it may influence the employment growth. However, growth
always support by the higher output of the agriculture. The higher output was made means need a
lot of employment to produce the productivity and it may help to improve the strong domestic
demand for agriculture. Therefore, increase in employment may attributed to the implementation
and increase the agriculture sector in order to improve the economic in Malaysia.

Chapter 4: Effect of Palm Oil in Malaysia

4.1 Economic Perspective

27
4.1.1 Factor that affect price of Plam Oil in Malysia Economic Growth.

Figure 8.6: Malaysia Palm Oil Price per T from 2011 to 2015

As we can see the Malaysia Palm oil Price is keep falling start from year 2011 until today.
Even though the price is keep falling but it also one of the important parts to help our economic
growth in the future. Besides, there are some reasons why our palm oil prices keep falling. The
one of the reason is the price of palm oil is influenced by production. As we know, the period for
price of palm oil remains at a high range in Malaysia. Therefore, many investors will interest and
invest in the palm oil industry in order to get the profit in the short term period. Hence, the palm
oil produces more than usual and it will directly affect the market to become surplus due to
quantity of supply is more than the quantity of demand. However, the price of palm oil keep
falling will also affected the suppliers of substitute good because their price are tending to move
together. Therefore, if there is more surplus of the palm oil, the price will be lower in future and
also hard to achieve the vision 2020 without palm oil industry. This is because of palm oil
industry take a very large important in order to boots up the Malaysia economic growth.

Next factor that makes the price of palm oil keep falling is due to export condition.
Nowadays, Malaysia focuses on export the palm oil to the countries like China and United State.

28
However, China and United States start to reduce their import of palm oil from Malaysia and
increase import from Indonesia. This is because price of palm oil Malaysia is higher than
Indonesia and the export tax from Indonesia is lower than Malaysia. Therefore, our economic
growth will be affected strongly by losing their customers and their product will not be sold. In
this situation, the revenue of the government Malaysia will decrease. Therefore, if there is no
revenue for government and government will try to use another way such as borrowing from
debt market in order to maintain the economic in Malaysia. Since, the palm oil export to foreign
country takes an important part. Therefore, if government Malaysia reduces the export tax in the
short term, it may helps our Malaysia economic growth in the future for the long term period.

Besides, another factor that affects the price of palm oil dropped is stockpile inventories
of the palm oil. It is because nowadays the quantity of supply is more than the quantity or
demand in Malaysia and the stock level has been build up. Since the palm oil produces a large
volume to abroad customer and atomically also increase their stockpile inventories. Therefore,
Malaysia are willing to sell and clear the palm oil in the lower price this is because due to the
surplus of resource in their inventories and the stock level of the producers become higher. So it
makes the income and revenue of the palm oil keep decrease. If the prices of the palm oil keep
decreasing, it may directly affect the Malaysia economic growth in the period of time.

In order to prevent the price of palm oil in Malaysia from keep falling, the government
Malaysia should reduce the charge of the export taxes from abroad importer. Besides that, they
also try to solve the surplus of palm oil in Malaysia and the economic condition in the country
will grow faster. When the country is wealthy, it is easier for develop further.

4.2 Social Perspective

4.2.1 Social conflicts

29
Because of land grabs, the conflicts may occur between local communities and companies if
without consultation or any compensation. Therefore, it can affect the companies and the ability
of expanding the land as planned.

4.2.2 Loss of livehoods

Conversion of forest brings social impacts on the right and livelihoods of indigenous
populations. This is because the people who live in rural areas depend on forests for range of
goods and services. The conversion of forest lead to the households which relying on forests
resources for income and food had to shift to other sources of livelihood such as food crop
cultivation for those who still owned land or construction activities.

4.2.3 Forced migration

Oil palm expansion has implied that the deforestation have to be carry out. Therefore, the lands
have to be cleared for oil palm plantation. For rural communities, land is the base of livelihoods.
If the land is used for oil palm plantation, which means that they have to be forced migrate to
other places.

4.2.4 Criminal cases

There is large scale of oil palm plantation in Malaysia because the demand of palm oil is high. It
means that they need a lot of labours to work in planting the oil palms. Therefore, there are high
employment opportunities in Malaysia, but the company may choose to cut the cost by hiring the
cheap labours such as Bangladesh because their wages are low. However, even though the hiring
of cheap labours from Bangladesh can cut the cost, but it bears the risk because there is illegal in
Malaysia. Companies will be fined if caught by government. In other hand, it may found out that
the criminal cases increased because Bangladesh always intervene in committing crime such as
robbery, rape and theft. The citizens of Malaysia have to be careful and beware of Bangladesh to
prevent the crimes happened.

4.3 Environment Perspective

4.4 Biodiversity loss

30
As the rapid expansion of the palm oil industry in Malaysia, which means that there are millions
of hectares of tropical forests have been destroyed for oil palm plantation. Because of large-scale
forest conversion, it leads the loss of critical habitat for endangered species such as orang utan,
rhinos, elephants, lions, tigers and etc. Therefore, it will cause the loss of biodiversity and
destroying the critical habitat.

4.4.1 Air pollution

To reduce the pests like rats within the oil palm plantation, the plantation workers will use the
poison or pesticides to eliminate them which also poison the other animals such as snakes.
Besides, it also leads air pollution by burning for clearing the vegetation in natural forests. The
burning of forests for oil palm plantation becomes a major cause of air pollution in Malaysia that
affected many areas of Southeast Asia in recent years. The haze produced posed health problems
for people throughout Southeast Asia especially to plantations workers. Smoke from tropical
fires can causes respiratory problems which is harm to human.

4.4.2 Soil erosion

Because of deforestation, it may cause the soil erosion happened when the workers are clearing
the vegetation and removes the protection of plants and roots needed to lock soil in place. If the
soil is carried away from a farmers filed by water, it may consists of contaminants such as
fertilizers and pesticides.

4.4.3 Water pollution

When there is soil erosion and runoff, it can cause the water pollution that contaminates drinking
water and disrupts the ecosystems of lakes and rivers. Meanwhile, the water pollution also
caused the threatening of aquatic life. In other hand, the forest conversion by plantation
industries contributes to climate change. It is because the forest fires used to clear vegetation for
oil palm plantation is the one cause of CO2 released from land clearing.

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