By Benjamin Low –
KUALA LUMPUR (Dow Jones)–Palm oil’s attractive price and health concerns linked to the use of rival oils are boosting demand for the tropical oil in the food industry, but Malaysian companies need to venture downstream and provide better packaging options to capitalize on the upsurge, a maker of palm oil-based products said.
Lately, increasing consumer awareness over the dangers of trans fatty acids found in hydrogenated soft oils such as soyoil have been spurring food manufacturers, particularly in the U.S. and Europe, to search for healthier alternatives.
As a result, palm oil has been growing in popularity in those markets and specialty oils and fats makers, and not bulk exporters, stand to gain the most, said Mazlan Muhammad, managing director of MM Vitaoils Sdn Bhd.
“There is demand for trans fatty acid-free alternatives, and in terms of pricing, (food companies) want to lower costs. Palm oil fits,” Mazlan said.
“This is a big opportunity because there is a ready buyer for the alternative oil. The only thing for us to do is to apply the finishing touch.”
The finishing touch, he said, is what is widely referred to in industry circles as “value addition”. That means not being content with producing palm oil and shipping it in bulk, but going downstream to make palm oil-based products like shortenings customized to the specifications of buyers.
Mazlan points to his own company, MM Vitaoils, as proof that demand for value-added products is booming.
The company was formed in mid-1999 as a commodity trader and exporter, but in September 2002, it changed businesses to become a maker of palm oil-based products.
Production began in 2003, focusing on four major products comprising shortenings, margarine, cooking oil and vegetable ghee.
In the first year of production, revenue touched MYR28 million. It grew sharply to MYR46 million in 2004.
“This year, we are targeting around MYR100 million,” he said.
Packaging Is The Secret Of Success
MM Vitaoils’ early success is attributed to its flexibility in the packaging of its products.
The company claims it has among the most extensive range of packaging sizes in the industry, from as small as 250-gram bottles to bags, cartons, cans and 192-kilogram drums, which is its largest.
Almost all of MM Vitaoils’ products are exported, with Europe being the largest destination, accounting for 40% of sales.
“The acceptance of palm oil is there. The important thing is whether we can follow their requirements because different users require very different packaging,” Mazlan said.
He said value addition also means working closely with customers to help them cut costs by switching to palm oil from soft oils more effectively.
Industry players in Malaysia that continue to sell their products without much added input are at risk of losing out.
“Nowadays, we must give the customer what they want, not merely offer them what we can produce,” he said. “Positioning, branding and packaging will do a world of good for the Malaysian palm oil industry, rather than just selling in bulk.”
By having wider packaging options, companies can also tap a wider range of users and command more stable profit margins.
“For (MM Vitaoils), our extensive packaging range allows us to average out our margins because we have a broader customer base and different levels of users. So the risk is less compared to selling in bulk,” he said.
About 90% of Malaysia’s palm oil exports are still in bulk form, Mazlan said.
He added that the lack of value addition was partly the cause of palm oil’s steep price discount to rival oils.
Palm oil is typically sold around $80-$140 a metric ton below the next cheapest oil, soyoil.
“There will come a day when we have more value added products than bulk products. Only then will palm oil be around the same price as soyoil,” he said.
CPO Price Seen Range-Bound In 2005
Eastern Europe and Central Asia are expected to be key growing markets for palm oil-based products in the coming years, Mazlan said.
“The former Soviet Union countries are very big. All this while they have been depending on domestically grown soft oils. They haven’t been introduced to palm oil, so this is a big opportunity,” he said.
MM Vitaoils is already selling its products to countries in that region such as Russia, Uzbekistan and Kazakhstan.
Meanwhile, Mazlan said he expects CPO prices to stay between MYR1,400 to MYR1,600 for the rest of the year, as the supply and demand scenario isn’t expected to change much in 2005.
The benchmark June CPO futures contract on the Bursa Malaysia Derivatives was last traded at MYR1,423/ton, up MYR4.
It has largely been hovering between the MYR1,400-MYR1,600 range since mid-2004.
Source: Yahoo Asia