KUALA LUMPUR: Malaysia, a major exporter of agricultural and mining commodities, experienced a significant decline in these exports in 2023.
But economists pointed out that the decline was offset by a surge in exports of manufactured goods.
This reflects a fundamental shift in Malaysia's export dynamics, highlighting a progress towards higher value-added industries.
They said the lower export of agricultural and mining commodities mirrors broader shifts in global demand, structural transformations within Malaysia's economy and mounting environmental pressures affecting key commodities like palm oil.
Sunway University economics professor Dr Yeah Kim Leng said primary agricultural and mining exports accounted for RM192.1 billion or 12 per cent of total exports in 2022.
He said it declined 19 per cent to RM156.1 billion or 11 per cent of total exports in 2023.
"It has been declining steadily, in line with the country's structural transformation from an agricultural and mining-based economy to a manufacturing-led one since the early 1970s.
"The current export share remained sizeable at 12 per cent in January and 13 per cent in February.
"The sharp 19 per cent decline in Malaysia's commodity exports in 2023 typifies the volatility of the global primary commodity sector."
According to Yeah, Malaysia's top primary commodity exports in 2023 were liquefied natural gas or LNG (RM59.6 billion or 4.2 per cent of total exports), palm oil (RM59.4 billion or 4.2 per cent) and crude oil (RM28.7 billion or 2.0 per cent).
These three commodities accounted for 95 per cent of Malaysia's total primary commodity exports in 2023.
Yeah said fossil fuels not only face depletion but a steady decline in usage as the economy shifts to renewables and green energy such as solar, wind and hydropower.
He said LNG is less polluting than coal and crude oil.
Yeah suggested that investments in new gas fields would have less risk of becoming stranded assets compared to crude oil and coal mining.
In line with the National Energy Transition Roadmap, he said opportunities abound for expanding renewable energy supplies as well as exports to neighbouring countries, especially Singapore.
"Palm oil and its derivatives will continue to be the country's top exports, although its expansion will be limited by the availability of suitable agricultural land and sustainability concerns over deforestation.
"Consequently, the growth strategy should focus on increasing yields and productivity under more intensive cultivation to sustain palm oil production and exports."
Economic analyst Dr Zulkufli Zakaria said palm oil is the largest agricultural export commodity, contributing more than US$17 billion, followed by rubber with more than US$1.3 billion.
"In ensuring the growth of these commodities, there should be a multi-stakeholder approach involving the government, industries and community.
"Technology and robotics must be adopted to capture the interest of future generations."
Tradeview Capital Sdn Bhd vice-president Tan Cheng Wen said the commodities driving Malaysia's trade and exports are oil and gas (O&G), followed by palm oil-related products.
Tan opined that a key headwind is the rising rhetoric regarding the environmental, social and governance agenda which may impact demand growth over the long term.
"Hence, it is essential that the government and the industries work together to improve industry practices.
Primary commodities a decade ago
According to Yeah, Malaysia was heavily reliant on exports of primary commodities such as palm oil, rubber, timber and natural gas a decade ago.
He said recent data indicated a decline in the production and share of these commodities in the export market.
"Factors such as uneconomical size, low yields, high production costs and labour shortages contributed to this concentration on a few commodities, resulting in their declining significance in total exports," he noted.
Zulkufli also highlighted the historical prominence of tin, timber and fish.
However, he underscored the unsustainable practices and lack of commodity growth management, which led to a decline in production for timber and fish exports.
This paved the way for a reconfiguration of Malaysia's export portfolio, with a focus on more sustainable and resilient commodities.
Contrary to expectations of diversification, Tan observed that the composition of primary commodities in Malaysia's exports remained largely unchanged over the years.
"This decline has been offset by the remarkable growth in manufactured goods exports, which accounted for 85 per cent of the total exports in 2023, a substantial increase from 67 per cent in 2013.
"This surge in manufactured goods exports signals a fundamental shift in Malaysia's export dynamics, highlighting the nation's progress towards higher value-added industries and economic resilience," he said.
As Malaysia navigates the complexities of global trade dynamics, the economists stressed the evolution from primary commodities to manufactured goods, underscoring the importance of strategic diversification and sustainable growth practices.
They said embracing innovation, enhancing productivity and fostering a conducive business environment will be pivotal in shaping Malaysia's export trajectory in the years to come.
Sectoral headwinds
On challenges in the commodity sector, Yeah said the main threat to the O&G industry is the shift to renewable energy.
He said governments around the world are committing to net zero emission targets to combat global warming and climate change.
"The export-oriented palm oil sector faces stiff competition from other palm and vegetable oil-producing countries.
Yeah said the commodity sector has weathered numerous cycles in the past.
He added that the ability of industry players to cope with demand and price volatilities will determine their survival and the pace of industry consolidation.
Meanwhile, Zulkufli said there are multiple challenges potentially affecting Malaysia, one of which is the shortage of domestic labour due to the low wages.
The limited adoption of technology in enhancing output is another challenge.
Consequently, he said there is low productivity due to human limitations compared to mechanical output.
This situation leads to lower yields and lower quality in the production of goods.
Additionally, Zulkufli said fluctuating prices have historically been a factor, when capitalism and competition were adopted as part of the business model.
"However, Malaysia can mitigate this by improving production through technological advancements and diversifying the end products of commodities, moving away from solely exporting raw materials.
"This would reduce the vulnerability to commodity price fluctuations."
Regarding foreign exchange risk, Zulkufli said there are two perspectives to consider.
He said while a weak ringgit may seem advantageous, it is not without drawbacks.
He added that the continuous decline in the ringgit makes Malaysia less competitive, as it affects various factors such as logistics costs, production costs, insurance and equipment maintenance.
"Equipment requires regular servicing and repairs, and costs escalate as the ringgit weakens.
"Many other hidden costs exist but are not mentioned, impacting the overall sales profit margin of commodities," he said.
Tan emphasised that price fluctuation is a significant challenge.
He noted that Malaysia also faces challenges such as the lack of cheap labour for the agricultural sector and depleting oil reserves for the mining sector.
CPO price forecast to remain firm in 2024
Bank Muamalat Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said the price outlook for crude palm oil (CPO) should be in the range of RM3,800 to RM3,900 per tonne by the end of 2024.
Nevertheless, he said ageing trees, the need for replanting, higher fertiliser costs and labour supply are expected to impact CPO price in the long term.
"My sense is that the price should be fairly stable, although from now until October, the production cycle is expected to increase, which may affect prices due to higher supply.
"Having said that, there is great potential in the palm oil sector regarding the renewable energy space.
"Areas such as waste-to-energy and sustainable aviation fuel would mean the greater use of palm oil."
Kenanga Research has maintained its average CPO price assumption of RM3,800 per tonne in 2024.
In a recent note, the research firm said the price is usually firmer in first quarter and weakest in third quarter, mainly due to the third quarter harvests of four major oil crops (palm, soyabean, rapeseed and sunflower) which make up 70 per cent to 80 per cent of the world's edible oil production.
FSMOne Malaysia believes that CPO price will stay elevated throughout this year, supported by the El Nino weather, seasonal effects-driven factors and pricing convergence against soyabean oil.
Besides, it said the extension of low import duties on edible oils in India until March 2025 could provide support for the CPO price in 2024.
"This could drive the earnings of plantation players in 2024 while the uptrend in CPO price might buoy investors' excitement in this sector as well.
"Our forecast for CPO price in 2024 is RM 3,800 to RM4,000 per tonne," the investment firm said in a report.
The Malaysian Palm Oil Board (MPOB) anticipates a positive trajectory for the country's palm oil industry in 2024 on the back of better labour supply and stronger price projections.
It forecasts the price of CPO to range between RM3,900 and RM4,200 per tonne. This is driven by the implementation of the B35 biodiesel mandate in Indonesia, which is likely to reduce the global palm oil supply for export.
MPOB said the mandate could lead to a tightening of the global palm oil supply due to unfavourable weather conditions in 2023 and ongoing tightness in soyabean production until at least this month. Consequently, the country's palm oil stocks are expected to remain below two million tonnes, helping to stabilise the price.