Palm oil outlook positive in Asia

The vegetable oil industry has witnessed significant growth over the past few years on account of a growing population as well as the rising demand for alternative energy sources.

By Dr. N. Yogaratnam

Among the various types of vegetable oil, palm oil (including palm kernel) accounted for the largest share of the global production in 2009, followed by soybean and rapeseed oil.

Of the available vegetable oils, palm oil is the most productive and has the lowest cost of production, thus accounting for the major share of the global vegetable oil output. In recent years, the rising health concerns have also accelerated the demand for palm oil, particularly in developed markets. Palm oil use is broadly separated into food and non-food categories. The product is mainly used as cooking oil but is also increasingly being used in the preparation of other food articles. As a non-food ingredient, the product finds application in the production of cosmetics, toiletries, soaps and detergents.

Although, FMCG is the largest market, the utilisation of palm oil for the production of bio-diesel has been growing steadily. Apart from this, the switch of consumers from loose oil to packed oil, particularly in emerging markets, is also expected to boost the palm oil industry’s growth in the future.

Geographically, Indonesia and Malaysia are the largest producers of palm oil, while China and the EU are the largest consumers. In Europe, Germany is the largest consumer of palm oil, followed by France and Italy. The emerging markets, like China, India and Indonesia consume more than 80% of palm oil. Due to rising population and increasing income, the emerging markets including China and India are anticipated to record an increase in demand for palm oil.

After bouncing back from the recession, Malaysian and Indonesian palm oil demand is set to rise strongly, with new uses driving growth

Oleo-chemical industry

The oleo-chemical industry in Southeast Asia is expected to enjoy robust growth in 2010-2012, fuelled by a short-term hike in demand from consumer markets and wider availability of raw materials such as palm oil, palm kernel oil and coconut oil.

Long-term growth is expected to be stimulated by growing markets for green chemicals and uses in new applications.

On the other hand, the Asian oleo-chemical industry faces the challenges posed by the slowdown in global demand in export markets following the October 2008 economic crisis and increasing competition from cash-rich plantations and petrochemical companies that are keen to get a slice of the oleo-chemical production pie.

In Southeast Asia, oleo-chemical production is mainly centred on the manufacture of fatty acids, fatty alcohols, methyl esters and refined glycerine.

These then go into the end-use applications of surfactants, soap and detergents, cosmetics and food emulsifiers. New applications driving growth are in the areas of bio-lubricants, green chemicals, bio-plastics and biopolymers.

Although export markets and the global oleo-chemical industry experienced a slowdown in 2009 in the aftermath of the crisis of October 2008, the first half of 2010 saw an improvement in demand for Asian-based oleo-chemicals.

Industry outlook

Fatty acid demand is expected to continue to be strong in 2010, fuelled by growth in consumer products such as cosmetics and plastics. Prices of fatty acids in Asia are dependent on feedstock palm kernel, palm stearin and crude palm oil prices and tend to follow the price trends of these raw materials.

The first half of 2010 saw prices of most fatty acid groups rising month-on-month, in tandem with higher feedstock values. In the second half of the year, prices of most fatty acids are also expected to remain firm as a result of higher projected feedstock values.

The total capacity output of fatty acids in Southeast Asia is estimated to be 3.5m tonnes in 2010, with oleo-chemical production in Malaysia alone accounting for around 57% of that worldwide.

Similarly, fatty alcohol production is expected to grow at a rate of 5% in 2010 as demand for consumer products such as detergents and industrial surfactants is expected to increase year on year.

Prices have steadily increased for both mid-cut and long-chain alcohols since January and reached a historical high for mid-cut alcohols in August at levels above $2,000/tonne (€1,531/tonne) FOB (free on board) Southeast Asia.

Prices in the second half of the year are expected to continue to rise on the back of tight supply amid a few regional plant shutdowns, as well as higher feedstock values.

New uses for refined glycerine

In the refined glycerine space, growth is expected to be slower in 2010 but is predicted to pick up in 2011-2012, fuelled by newer applications such as those of epichlorohydrin (ECH), propylene glycol (PG) and other new applications currently under research, including aromatic solvents and polymers.

2010 has also seen weaker demand for refined glycerine as a result of oversupply in the market.

The projected growth of the refined glycerine industry is around 5.8% in 2010. The estimated demand for refined glycerine in 2010 is expected to be around 280,000 tonnes, while it is estimated that supply from oleo-chemical production including China, will be double demand, at 543,000 tonnes.

Prices in the second half of the year are expected to remain soft-to-stable as the weak demand situation is likely to persist until the end of the year.

Malaysia beats Indonesia

Although Indonesia is the world’s largest producer of palm oil - the most important feedstock for oleo-chemical production – the country still trails behind Malaysia, the world’s second-largest producer in the production capacity of oleo- chemicals by a factor of roughly two.

Indonesia owns a share of 12% of the world’s 6m tonne/year oleo chemical market; this equates approximately 720,000 tonnes/year. On the other hand, Malaysia supplies 18.6% of global oleo- chemical capacity, or 1.1m tonnes/year.

The success of Malaysia as a leader of oleo-chemicals in Asia stems from the country’s technological capability to successfully process crude palm oil (CPO) into more than 120 types of downstream products. These are higher in value compared with Indonesia, which has the technology to produce only 10 types.

Moreover, Indonesia’s oleo-chemical growth strategy focus is still centred on CPO production with little government intervention and aid. Investment and growth in the sector is mainly left to the private sector.

Malaysia’s oleo-chemical industry continues to enjoy strong support from both the government and private sectors. The Malaysian government also aids the development of the downstream oleo-chemical sector through the provision of stimulus packages.

In contrast, the Indonesian Government has imposed an export tax of only 3% on CPO exports, leaving the development of the oleo-chemical industry entirely to private sector plantation owners.

Most of these are more interested in the profitable export of CPO, rather than investments into further downstream products such as esters, methyl stearates and amides. Moreover, the Indonesian government also lacks the funds to develop the oleo-chemical industry, as well as to develop new plantations.

Around 48% of fatty alcohol consumption in Indonesia is for detergent and cleaning materials and 11% goes into the production of antioxidants. Glycerine is used mainly in the production of soap, cosmetics and pharmaceuticals, accounting for 37% of Indonesia’s glycerine consumption.

Other uses for glycerine in the country are in the manufacture of alkyd resin and food products, both amounting to 24% of glycerine consumption in the country.

Malaysia, on the other hand, is committed to boosting its leadership position in the oleo-chemical industry by developing its status as a global hub for palm oil and the preferred destination for foreign investments in oleo-chemical-based products, bulking facilities and research and development. The country exported a total of 1,301,590 tonnes of oleo-chemicals in January-July this year, according to the Malaysian Palm Oil Board. Indonesian export figures are currently unavailable.

In addition, the Malaysian government has also committed to boost the palm oil industry’s output in relation to the country’s gross domestic product (GDP) to ringgits (M$) 21.9bn ($6.94bn), with M$69.3 billion in exports earnings, as part of the 10th Malaysia Plan period (2011-2015).

Integration appreciation

The government initiatives include development of palm oil industrial clusters into integrated sites for promoting downstream activities such as bio-fuels, oleo-chemicals, bio-fertilisers, specialty food and biomass products, nutraceuticals and pharmaceuticals. These initiatives are expected to boost the country’s reputation as a global leader in the value-added space of palm oil products.

With 16 oleo-chemical plants with a combined capacity of 1.9m tonnes/year, there is much potential for growth in the global oleo-chemical space in Malaysia.

Future capacity expansion

The growth in the oleo-chemical industry is expected to remain strong, especially in Malaysia. New capacity is expected to be added. This includes an expansion plan by Malaysia’s Emery Oleochemical to boost its fatty acid capacity from 600,000 tonnes to 900,000 tonnes by 2012.

Biotech companies Glycos Biotechnologies of the US and Malaysia’s Bio-XCell have also entered a joint venture to build a biochemical and biotechnology centre in Malaysia that would utilise glycerine to produce bio-chemicals. The centre will be completed in 2012.

In Indonesia, Singapore agriculture group Wilmar International has also entered a joint venture with US vegetable oil derivatives specialist Elevance Renewable Sciences to set up a 180,000 tonne/year bio-refinery at Surabaya, Indonesia, due to be operational in 2011. The bio-refinery will produce a high-quality mix of oleo-chemicals, among other products.

These initiatives are expected to boost the Malaysia’s reputation as a global leader

Sri Lankan scenario

Sri Lanka’s interest in this sub-sector centres on the cultivation of about 75,000 ha by five Regional Plantation Companies (RPCs), around 70,000 ha of which are in Indonesia and Malaysia, and about 5,000 ha in Sri Lanka.

The revival of NR market boom, although known to be very volatile, may dampen the enthusiasm generated among some plantation companies. Yet, as the oil palm forecasts look very stimulating and attractive in the long term, crop diversification strategies planned and adopted by some RPCs are expected to grow. The Ministry of Plantation Industries also proposes to expand the land extent under oil palm from the current 5,000 hectares to 25,000 hectares as a tree crop diversification policy for sustainable development of this sector. A public-private sector partnership becomes crucial in this programme.