Shift towards oleo derivatives showing good progress


KUALA LUMPUR: Local oil palm companies are keen to invest further downstream from oleochemicals to oleo derivatives, but many are still hesitant given the good revenue derived from their core upstream business.

Malaysian Investment Development Authority (Mida) chief executive officer Datuk Azman Mahmud (pic) attributed the slow take up rate to the perception that oleo derivatives business was capital intensive and involved some challenges.

“Most industry players are cautious and still living in their comfort zone – producing crude palm oil (CPO) especially when the price year-to-date is trading much higher compared to last year,” Azman told StarBiz recently.

Towards this, Mida as the country’s principal investment promotion agency, is calling on oil palm companies and SME players to seize the opportunities in the oleo derivatives industry, which offer higher margins in the long run.

In the past five years, Mida has assisted many palm oil companies to venture into oleochemicals and oleo derivatives projects as well as the evaluation of applications for manufacturing licences and tax incentives.

Oleochemicals, Oleochemical Derivatives or Preparations are included in the list of promoted activities and products which are eligible for tax incentives considerations under the Promotion of Investment Act 1986 depending on the merits of each project.

Under the National Transformation Programme’s Palm Oil & Rubber National Key Economic Area, investment in commercialisation of oleo derivatives as well as food and health products can also obtain capital grants.

Mida is part of the Technical Committee along with Ministry of Plantation Industries and Commodities, Malaysian Palm Oil Board and Performance Management and Delivery Unit that evaluates such projects.

Under the 10th Malaysia Plan, over 15 projects, making up a total investment of over RM2.3bil have benefited from these grants.

Mida also considers and approves various tax incentives for eligible companies that produce oleo derivatives, such as “customised incentives” particularly to further drive the shifts to downstream activities.

To further unlock the potential for investments in palm-based downstream activities, Azman said research and development (R&D) is an important key to attract quality investments into Malaysia.

“To encourage R&D and commercialisation, the Government saw the need to bridge the gap between technical fund and commercialisation by encouraging closer collaborations between companies and research institutions,” he added.

The collaborative industry-academia platforms include PlaTCOM Ventures, a collaboration between Agensi Inovasi Malaysia and SMECorp, and Steinbeis Malaysia Foundation.

The newly set-up Chemical & Advanced Material Investment Advisory Panel meanwhile is responsible in formulating and recommending strategies to the Government for the development of the chemical industry based on the 11th Malaysia Plan.


Azman said specialty products usually mean smaller and more specific markets where companies would potentially face stiffer competition from established companies and brand names in the niche market.

Production of oleo derivatives or speciality oleochemicals usually requires specific R&D and marketing focus while complying with customers’ requirements.

The challenge involved would be the uncertain timeline for full scale commercialisation.

At the same time, potential investors of both big companies and SME players may find it challenging to find partners to scale up production.

Azman said: “Major palm oil players or basic oleochemical producers, despite their deep pockets, are reluctant to invest further downstream or acquire foreign companies because of the risks involved, while the SMEs usually face financing issues.”

Mida via its extensive network is continously connecting interested parties with a view to establish smart partnerships in Malaysia.

Meanwhile, Malaysian Oleochemical Manufacturers’ Group chairman Tan Kean Hua said the oleo derivatives industry in the past five years has evolved albeit varying between different companies.

“Some have progressed by acquiring technologies and overseas companies. Hence becoming more value-added and downstream driven,” he said.

Given the more stringent and demanding downstream market, Tan added that “the quality and technical requirements are also much tougher.”

For instance, the plants and facilities have to be designed to meet higher specifications and standards.

“Not only is the technical requirement different but the people and service requirements are more demanding as well. “

In general, the downstream sectors are closer to the consumer end and also, in the higher end sectors such as personal care, cosmetics, food nutrition etc.

“These are part of the learning curves required,” Tan explained.Competitions ahead

According to Tan, local oleochemicals and oleo derivatives industry players still have “a much better standing” in comparison to their peers in Indonesia.

Although Indonesian players in terms of revenue were bigger due to their installed capacity, he added that “local players have higher profitability. In terms of reputation, we are seen as better quality and consistent producers as well as more reliable and responsive in our services and deliveries.”

To stay ahead of the competitors, Tan urged local industry players to continue to drive operational efficiencies and improve productivity – to have a better cost base.

They must also differentiate and provide better customer and technical services.

Tan pointed out that margins will gradually erode when the supply balance equation is tilted.

“Overall plant utilisations could drop. This could affect profitability in mid term. But the fact is that the downstream margins are still much higher than upstream (basic oleo) business. To preempt these challenges, he said the plants should be versatile i.e. able to handle different products so that if a particular product’s demand demand falls, it can use the same plant for another product to compensate.

Under the 11th Plan, RM280mil worth of grants are allocated to support palm oil downstream development in oleo derivatives, food and health-based products and clinical trials, including for SMEs.

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