Versatile oil in a thriving industry

This is written by Bilqis Bahari and Ooi Tee Ching.

KUALA LUMPUR: PALM oil is very much in the food we eat, the cosmetics we wear and the detergents we use to launder our clothes.

When Business Times met up with Malaysian Oil Scientists' and Technologists' Association (MOSTA) president Tan Sri Augustine Ong recently, he asked, "Do you know that one in 10 working Malaysians are dependent or are in a job that deals with the palm oil industry?"

Many assume that the palm oil industry is just confined to farmers. But it is more than that, he said. Bankers, insurance companies, freight forwarders, cargo surveyors, scientists and engineers are also part of the palm oil supply chain.

Today, Malaysia's sprawling palm oil industry is employing more talents. The sector entails production of margarine, cooking oil, oleochemicals, transport and storage of palm oil at the ports, palm oil futures trading at brokerages, design and building of refineries and biodiesel plants, animal feeds, vitamin E extraction and even the development of nutrient-enriched cosmetics.

To extract palm oil, Ong explained, the fruit of the palm tree is collected and pressed, yielding a rich, dark-red oil. From there, about 90 per cent of the oil is processed into cooking oil, margarine, chocolate, candy and ice cream.

There are two types of oils that are derived from the palm fruit: Palm oil (which can be in semi-solid form) and palm kernel oil (which is extracted from the fruit kernel). 

In palm oil, the liquid portion is called palm olein where it is mostly used as cooking oil. The solid portion, which is known as palm stearin, is a source of natural fat component in shortenings and margarine.

"There are 17 kinds of oils in this world. Palm oil is the most consumed, while competing oil crops grown in cold countries are soyabean, rapeseed and sunflower," he told Business Times in an interview here recently.

He added that about 55 per cent of people in the world use liquid oil as their main cooking ingredient, whereas the remaining 45 per cent prefer solid fat like butter and ghee. 

"What is interesting about palm oil is that it provides both liquid oil and solid fat," he said. "The benefit of using palm oil in food preparation is that it extends the shelf life of the product and is rich in vitamins," Ong said.

He explained that unlike the limited vitamin E range in soft oils extracted from soyabean, rapeseed and sunflower, tropical palm oil vitamin E contains tocotrienols which have cholesterol-lowering and anti-cancer properties. 

In view of such life-saving attributes, Ong said, medical researchers all over the world are carrying out clinical trials on the usage of palm oil vitamin E in the prevention of degenerative diseases such as cancer and stroke. 

"Indeed, palm oil is nature's gift to Malaysia and Malaysia's gift to the world," he added.

Last year, Malaysia reaped RM80 billion in foreign earnings from palm oil exports. 

Besides income from exports, the economic significance of palm oil is also seen from nearly a million people directly employed in the estates and another million consider their livelihoods dependent on this industry.

In a separate interview, KL-Kepong Oleochemical managing director A. K. Yeow concurred with Ong on palm oil's versatility, saying about 10 per cent of its usage goes to the manufacture of oleochemicals.

Oleochemicals are essentially derived from animal and plant fats through the process of fat splitting. 

When palm oil is hydrolysed into basic oleochemicals like fatty acids and glycerine, the fatty acids can be further processed into methyl esters and fatty alcohols. These are then processed to make soap, detergent intermediates, cosmetics and even infant formula, he said.

Yeow said many detergent and soap manufacturers choose the slightly expensive oleochemical over petrochemicals because it is sourced from palm kernel oil, a renewable feedstock.

On the global outlook for oleochemicals, he said demand is on the uptrend as rising living standards in emerging economies like China and India prompt more consumption of soaps, detergents and cosmetics.

In giving a bird's eye view of the industry, Yeow said sectors like logistics, insurance and banking are part of the palm oil supply chain. "You would need people to transport palm oil from the mill to the refinery. When the volume is so big, you'll need lorry tankers and ships. There are also bulking and storage tanks at the jetties."

"When you transport the oil from the estate to the seaport, you will need to make sure it gets there safe. This is where the insurance comes in. Apart from that, some people might not have enough cash, that is where bank loans come in," he said. 

Since 2010, stock exchange regulator Bursa Malaysia Bhd has set up Bursa Suq Al-Sila for banks to buy and sell crude palm oil futures to facilitate Islamic finance. 

The transactions on Bursa Suq Al-Sila involves an Islamic bank buying crude palm oil from the spot market and then sells it to the borrower. The borrower then sells the crude palm oil to a third party in the spot market for cash, using the bank as its agent, thus securing the financing.

Malaysia, the world's biggest Islamic bond market, is embarking on more than US$400 billion (RM1.25 billion) decade-long economic development. The government and the private sector leverage on palm oil as the underlying commodity in Islamic finance.

Kuala Lumpur Kepong Bhd (KLK) recently sold RM1 billion of 10-year Islamic bonds. Sime Darby Bhd is planning its first multi-currency Islamic bond programme of as much as US$1.5 billion to raise funds for capital expenditure.

It is anticipated that this year, sales of corporate Islamic bonds that pay returns on assets instead of interest, are approaching a record high. As of to-date, issuance of the islamic financing instrument rose 41 per cent or RM43.2 billion from last year's RM75.6 billion.

"So, as you can see, the palm oil industry is not just about planting oil palms. There're a whole lot of other business activities coming together to make this a thriving industry," Yeow noted.

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