Friday 04 Oct 2024
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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.

R&D unit plays crucial supporting role

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.” 

KLK strengthens market presence despite challenging operating environment

It is perhaps no coincidence that 20 years ago, in 2004, Kuala Lumpur Kepong Bhd (KL:KLK) broke ground at the site of indirect subsidiary Taiko Palm-Oleo (Zhangjiagang) Co Ltd’s (TPOZ) oleochemicals manufacturing facility in Zhangjiagang, China, and on July 10, the group invited Deputy Minister of Plantation and Commodities Datuk Chan Foong Hin to officially open its fifth plant at the same place.

In 2006, the first plant was launched by then minister of Plantation Industries and Commodities Datuk Peter Chin (now Tan Sri). A plaque on a wall in TPOZ’s research and development centre commemorates the event.

Two decades on, KLK’s TPOZ continues to expand in China’s competitive oleochemicals market.

The new high-purity fatty acids and glycerin plant located within the 58-acre facility will bring TPOZ’s annual processing output to 500,000 tonnes, making it one of the largest oleochemical processing facilities within a single site in China.

“The expansion into China was driven by KLK’s commitment to strengthen its global presence in the oils and fats as well as derivatives markets. Our goal has been to boost production capacity and capitalise on the growth opportunities within China’s dynamic economy. The presence of our facility in Zhangjiagang has been pivotal in realising this vision. It has enabled us to cater to a growing market, both domestic consumption and international export,” says Kow Tiat Yong, deputy CEO of KLK Oleo, KLK’s oleochemicals manufacturing division.

In fact, China was the first country that KLK Oleo expanded into. Today, TPOZ’s product portfolio comprises fractionated and distilled fatty acids, glycerine (food and pharmaceutical application) and soap noodles. Its customers are from a wide spectrum of the economy and include manufacturers of home and personal care products, cosmetics and toiletries, paper, textiles, PVC and tyres.

TPOZ also makes triacetin, which is used in cigarette filter tips, food and fragrances, as well as an emulsifier and foundry application, and fatty acid bis-amides (EBS), which are used in polymers, plastics, inks and textiles, among others.

“We [our products] cover a wide scope. As a result, we know China’s economy very well, we know the heartbeat of the economy,” TPOZ managing director Kuay Cheow Kwee told Chan and members of his trade mission in a presentation during the official opening.

Most of TPOZ’s products are for China’s domestic market. “Our manufacturing site is strategically located in the Yangtze Delta to facilitate ease of transport to locations such as Tianjin, Chongqing, Chengdu, Xiamen, Shantou and Guangzhou,” says Kow.

KLK declined to reveal the cost of the new plant, citing competition concerns.

TPOZ is still looking to expand its product range at the current site, given its strategic location near the Yangtze River and within a well-planned industrial park, as well as the availability of local talent.

“We are focusing on downstream products, including oleic acid and EBS,” says Kow.

However, KLK will not be expanding further downstream into speciality fats as it is more feasible to locate this business in Malaysia or Indonesia “where we can optimise supply chain efficiency for raw materials such as crude palm oil, crude palm kernel oil and RBD (refined, bleached and deodorised) palm stearin,” he explains.

High export duties and levies on palm oil products from Indonesia also make expanding the speciality fats business in China less competitive, he adds.

TPOZ’s inputs are RBD palm stearin, crude palm kernel oil and crude palm oil. “We use Malaysian palm oil or Malaysian-sourced raw materials. When we bring in our palm, especially RBD palm stearin, our product is white, [of] very good quality, and the market accepts it,” Kuay says.

In fact, he says KLK changed the market’s perception of stearic acid, which was yellowish in the past because of the use of animal oils. “We moved to kosher and halal ingredients. That’s how we transitioned our positioning,” he explains.

Furthermore, among TPOZ’s customers, palm products have demonstrated superior functional and sustainability performance, and are highly accessible compared to competitor commodities.

This translates into a superior consumer experience at competitive pricing, helping TPOZ secure its value proposition in the market, Kow explains.

However, despite KLK’s strong presence in China in the oleochemicals business, the group’s manufacturing segment — the second largest profit contributor after plantation — continued to suffer in the second quarter ended March 31, 2024 (2QFY2024) with profit plunging by 69.5% on a year-on-year basis due to weaknesses in Europe and China. According to notes in its 2QFY2024 financials, demand from China remained sluggish.

“Currently, the macroeconomics conditions in China are quite challenging. Economic growth has slowed down due to weak global demand, particularly in the manufacturing sector. Unemployment rates are rising, and domestic spending is weak. Consumers are very cautious with spending, affecting demand,” says Kow.

In the second quarter of this year, China’s economic growth slowed to 4.7% from 5.3% in the previous quarter. For 2024, the International Monetary Fund has forecast GDP growth of 5% for China compared to the 5.2% registered in 2023. 

Nevertheless, the Chinese government has taken steps to stimulate the economy although major macroeconomic stimulus remains limited and its effectiveness remains uncertain. Therefore, the market for oleochemicals players in China remains very competitive as oversupply continues to weigh heavily on margins, he notes.

KLK’s manufacturing segment comprises its oleochemicals, refineries and non-oleochemical businesses. 

While the outlook remains challenging, the commissioning of the new plant should boost KLK Oleo’s contribution to the group.

“… China is one of the largest economies of the world and a key strategic market for our industry. We are confident that when it resolves its macroeconomic challenges, it will once again be a growth and profitable market for us,” says Kow.

 

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