SINGAPORE, Sept 5 Indonesian palm oil companies, among the world's biggest, are rushing to bump up capacity to produce higher-value chemicals made from the vegetable oil by as much as a third, hoping to escape the paper-thin margins in their refining business.
Malaysian rivals Sime Darby Bhd, IOI Corp and Kuala Lumpur Kepong Bhd are already active in the $20 billion market for basic oleochemicals. Now their Indonesian counterparts such as Golden Agri-Resources Ltd are catching on.
Driving the Indonesians are shrinking crude palm oil refining margins, which plummeted to near zero earlier this year as refining capacity hit a record.
Tax changes in 2011 discouraging crude palm oil exports have sparked a wave of capacity building to make refined palm oil products, which enjoy lower export tax rates than crude palm oil. Now, refined palm oil products are hardly profitable.
But the race to build plants for oleochemicals, processed from refined palm oil products, is starting to stoke concerns of looming oversupply in the short term.
"We are concerned about the additional capacity coming online in Indonesia," said Tan Kean Hua, executive director of IOI Oleochemical Bhd and chairman of Malaysian Oleochemical Manufacturers Association. "If the additional capacity grows to a very large number, that will affect margins."
In Malaysia, production of basic oleochemicals on average enjoys margins of 8-12 percent, and production of derivatives from these chemicals has margins north of 20 percent, Tan said.
Indonesia is estimated to add 500,000 to 1 million tonnes of oleochemicals capacity next year, bringing the total to 3.5-4 million tonnes, compared with the current 2.5 million tonnes of capacity in Malaysia, Tan added.
He was confident, however, that Malaysia's experience in the industry will give them an upper hand in the competition.
Golden Agri, the world's second-largest palm oil planter by acreage after Malaysia's Sime Darby, plans to increase its oleochemicals capacity fourfold to 376,000 tonnes in two years.
Basic oleochemicals are divided into fatty acids and fatty alcohols. They can be further processed into products that end up in soaps, detergents, shampoos and other personal care products, whose long-term prospects are bright thanks to booming economies in emerging markets in Asia and elsewhere.
Golden Agri plans to add fatty alcohols to its oleochemicals portfolio by 2016, in addition to fatty acids that it already produces.
"It is also part of our growth strategy to widen our product portfolio and shift our production mix to higher value-added products," said Rafael Concepcion, Jr., Golden Agri's chief financial officer, expecting the oleochemicals sector to grow 3-5 percent annually.
Companies that are further along the oleochemicals path are now making their foray into the more sophisticated derivative products, with competition in the basic oleochemicals market growing stiffer.
This year, Wilmar International Ltd, the world's biggest palm oil processor, announced plans to acquire a Malaysian biodiesel and glycerine refinery, as well as a Europe-based surfactant business. It has also formed a joint venture in Ethiopia to produce specialty fats, soaps and detergents.
Wilmar declined to be interviewed for this article.
"Most of us are on the same track. We are going one step downstream to the derivatives business," said Tan of IOI.
Indonesia and Malaysia currently account for nearly half of the global capacity for basic forms of oleochemicals, according to Chris de Lavigne, global vice president of consulting at Frost & Sullivan.
The two countries supply around 85 percent of the world's palm oil. (Editing by Ryan Woo)