This article first appeared in The Edge Malaysia Weekly on July 22, 2024 - July 28, 2024

ALTHOUGH China has been one of the top three buyers of Malaysian palm oil for many years, volumes have been declining, falling to 1.47 million tonnes in 2023 from the recent peak of 2.73 million tonnes in 2020.

The observation is not lost on Deputy Minister of Plantation and Commodities Datuk Chan Foong Hin, who led a trade mission to promote palm oil in Shanghai, Nanjing and Beijing from July 7 to 13.

His objective is simple, to raise the value of Malaysian palm oil exports to China.

“Indonesia overtook us as a palm oil exporter. One of the reasons is, of course, they are bigger in terms of land size and, secondly, their duty structure is more competitive compared with ours,” he tells The Edge in an interview.

“We want to sell higher-value products, expand into the niche markets. We believe that Indonesia in terms of R&D (research and development) for palm oil is far behind us. Our trees are older, productivity has dropped, we are always stuck at 18 million tonnes of CPO (crude palm oil) annually. If the MPs ask ‘Apakah cara mempertingkatkan export?’, the right question is how to raise the nilai. That is the whole idea behind this trade mission,” says Chan, who is MP for Kota Kinabalu.

Indonesia and Malaysia are the world’s top two producers of palm oil, producing a total of 66 million tonnes last year, with the former contributing 47 million and the latter close to 19 million.

Apart from volume, Malaysia has also lost out on price. Indonesia’s export duties on palm oil, structured in such a way to encourage more downstream investments and production of refined palm oil products, has resulted in Malaysian palm oil products becoming more expensive and less competitive for importing countries.

This is reflected in the buying pattern of major price-sensitive palm oil markets such as India and China, where Indonesian palm oil dominates.

The good news is that the Ministry of Plantation and Commodities (MPC) is undertaking a review of the existing duties and tax structure in the palm oil sector amid complaints from producers about the various taxes levied. Apart from corporate income tax, palm oil producers pay a RM16 cess on every tonne of crude palm oil produced to the Malaysian Palm Oil Board (MPOB), they are also subject to a windfall profit levy of 3% when CPO prices are above RM3,000 (Peninsular Malaysia) and RM3,500 (Sabah, Sarawak) while Sabah and Sarawak producers also pay a state sales tax.

“Our ministry has formed a committee to review the existing duty structure and taxation structure for the palm oil industry — the windfall tax and others. We always receive complaints that this industry is heavily taxed. Some will argue that the government has taxed away some 40% from the overall revenue,” says Chan.

But will a different export duty or tax structure make Malaysian palm oil more competitive? Some say costs are naturally higher here compared with Indonesia due to many factors, including the plantation sector’s dependence on foreign labour.

In any case, the Ministry of Finance decides on tax matters, not the other ministries.

While the review is ongoing, Chan sees the need to maintain Malaysian palm oil products’ competitive advantage especially in China. During the six-day visit, his trade mission promoted tocotrienol — a form of Vitamin E sourced from palm oil — to be used as a food ingredient and red palm oil to be used in animal feed. He also highlighted the Malaysian Sustainable Palm Oil certification to Chinese buyers and opened the door for discussions between palm oil producers and Alibaba.

“Alibaba is a trading platform that we’d like to make use of to provide more opportunities to independent refineries or independent palm oil mills (to sell on the platform). Theoretically, it’s a large platform, very efficient, but then how it really works, we don’t know. But it’s good for us to explore,” he says.

Chan sees himself as a salesman as well as a matchmaker, arranging meetings between Malaysian palm oil players and Chinese companies, including the likes of Juneyao Group, Sinolight Group, Tingyi (Cayman Islands) Holding and Want Want China Holdings. Juneyao has interests in air transport, financial service, education and consumer goods. Sinolight produces surfactants crucial to an array of daily chemical products. Tingyi is famous for its Kang Shifu instant noodles and Want Want for its rice crackers.

“The food industry is very competitive, not much technology involved but, of course, they (the food companies) are big. This is the traditional market. Palm oil in most people’s mind, it is edible. In fact, we still have more to do for the non-food segment,” he says of potential market share to be gained.

Any good salesman will value the services provided by the support team. For Chan, the Shanghai-based Palm Oil Research and Technical Service Institute of Malaysian Palm Oil Board (Portsim) plays a critical role in providing “after sales” service to buyers of Malaysian palm oil.

Portsim was set up in 2005 and serves as a branch of MPOB in China. Its objectives are to develop and expand Malaysia’s palm oil market in China as well as provide technical support and advisory services for related enterprises.

It conducts studies with industries and universities in China, and aims to resolve issues faced in the application of palm oil in their products. In the last 20 years, Portsim has undertaken 105 R&D projects, of which 54 have been commercialised.

One of Portsim’s recent achievements was getting tocotrienol, which is noted for its antioxidant properties, approved by the General Administration of Customs, China, to be used as a food ingredient in March this year.

An oft-quoted story is the usage of palm oil in China’s famous mala hot pot soup base. The use of palm oil as a key ingredient for the spicy, numbing broth came about due to disruptions in the supply of beef tallow during the pandemic. Furthermore, palm oil’s semi-solid state at room temperature also helps due to the ease in transporting the hot pot sauce.

“There’s been a lot of palm shortening going into Chengdu, Chongqing, for use in mala hotpots. But people still prefer tallow for its texture and flavour, but palm, we have the supply. We are doing R&D to improve on its texture and flavour for its application in hot pot broth,” says Portsim’s general manager Yoong Jun Hao.

Portsim has also done research on the use of palm oil in naan, chocolates, ice-cream, vegan meat, cattle feed and pet food. It is MPOB’s only R&D centre outside Malaysia.

On whether more funds should be allocated to Portsim, which runs on an annual budget of less than RM5 million, or have more such centres in major palm oil markets, Chan says the ministry’s priority now is to improve the upstream by raising the yields of Malaysian oil palm trees.

“First things first, we need to set the priorities of this ministry. Portsim’s role is to support the after-sales market in China. At this stage, is this more important or to increase the yield first? As far as my minister (Datuk Seri Johari Abdul Ghani) is concerned at this moment, the direction of the ministry is still very much on how to increase the yield. We are stuck at 18 million tonnes per year,” he explains.

Nevertheless, Chan recognises Portsim’s role in shoring up Malaysian palm oil’s market share in China, saying “We don’t want another decline.”

That’s not to say the downstream sector is less important.

“It is equally important given the stiff competition from Indonesia. How should we play the game? It still goes back to dollars and sense. We know that customers always want to reduce the price. So how are we going to maintain our price? We need to enhance our value. That’s the only way. Portsim plays a significant role as long as it can provide innovative solutions to the Chinese market.

“Yes, our volume cannot compete with Indonesia, but we still have some room to play ... we take some initiatives — we look at the overall taxation [structure] but we need to deliver the value, tell the end users that Malaysians are more innovative in providing innovative solutions,” he says.

Over the last five years, the composition of Chinese palm oil imports from Malaysia has evolved. According to MPOB data, a higher percentage of palm oil was sold as refined, bleached and deodorised (RBD) palm stearin or fats with functionalities and specialities compared with mainly importing only cooking oil from Malaysia. Be that as it may, the absolute figure in terms of volume is still shrinking.

For downstream players, an emerging challenge is buyer concerns over the presence of potentially carcinogenic contaminants 3-monochloropropanediol (3-MCPD) and glycidyl esters (GE) in palm oil products.

Regulations are in place in the European Union (EU) to regulate these compounds in vegetable oils but China has yet to formalise any requirement although some say the threshold of 1.0ppm and 0.8ppm have been applied for 3-MCPD and GE in the sampling done by Chinese authorities.

“It’s not mandatory yet, it’s just a guide,” says a palm oil player who charges between US$80 and US$100 per tonne for additional processing to reduce 3-MCPD and GE.

MPOB director-general Datuk Dr Ahmad Parveez Ghulam Kadir asserts that methods to test and reduce the contaminants are already available in Malaysia. Standards on 3-MCPD and GE were being developed until Covid-19 hit and have been delayed to 2026.

“Right now, it’s based on demand and it’s B2B. Only the EU has a regulation [on 3-MCPD and GE], so anything going to EU must comply. For this purpose, there is enough palm oil to fulfil the requirement of lower 3-MCPD and GE,” he says.

The contaminants are a by-product of high-temperature food processing and can be found in all vegetable oils including rapeseed, soybean, coconut, sunflower seed and palm oil, as well as margarines.

Apart from regulatory requirements and competition from Indonesian palm oil, Malaysian palm oil also has to contend with other competing oils, especially soybean oil.

As for the need to continuously innovate, what is to stop the Indonesians from doing the same?

“Then we have to keep innovating,” says Portsim’s Yoong. “We have to compete in terms of functionalities and applications, we can’t compete on price. They buy palm oil because they need the functionalities, they need the technology, they need the formulations.” 

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