Tuesday April 12, 6:23 AM KUALA LUMPUR (Dow Jones)--Palm oil's attractiveprice and health concerns linked to the use of rival oils are boostingdemand for the tropical oil in the food industry, but Malaysian companiesneed to venture downstream and provide better packaging options tocapitalize on the upsurge, a maker of palm oil-based products said.
Lately, increasing consumer awareness over the dangers of trans fattyacids found in hydrogenated soft oils such as soyoil have been spurringfood manufacturers, particularly in the U.S. and Europe, to search forhealthier alternatives.
As a result, palm oil has been growing in popularity in those markets andspecialty oils and fats makers, and not bulk exporters, stand to gain themost, said Mazlan Muhammad, managing director of MM Vitaoils Sdn Bhd.
"There is demand for trans fatty acid-free alternatives, and in terms ofpricing, (food companies) want to lower costs. Palm oil fits," Mazlansaid.
"This is a big opportunity because there is a ready buyer for thealternative oil. The only thing for us to do is to apply the finishingtouch."
The finishing touch, he said, is what is widely referred to in industrycircles as "value addition". That means not being content with producingpalm oil and shipping it in bulk, but going downstream to make palmoil-based products like shortenings customized to the specifications ofbuyers.
Mazlan points to his own company, MM Vitaoils, as proof that demand forvalue-added products is booming.
The company was formed in mid-1999 as a commodity trader and exporter, butin September 2002, it changed businesses to become a maker of palmoil-based products.
Production began in 2003, focusing on four major products comprisingshortenings, margarine, cooking oil and vegetable ghee.
In the first year of production, revenue touched MYR28 million. It grewsharply 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 thepackaging of its products.
The company claims it has among the most extensive range of packagingsizes 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 thelargest destination, accounting for 40% of sales.
"The acceptance of palm oil is there. The important thing is whether wecan follow their requirements because different users require verydifferent packaging," Mazlan said.
He said value addition also means working closely with customers to helpthem cut costs by switching to palm oil from soft oils more effectively.
Industry players in Malaysia that continue to sell their products withoutmuch added input are at risk of losing out.
"Nowadays, we must give the customer what they want, not merely offer themwhat we can produce," he said. "Positioning, branding and packaging willdo a world of good for the Malaysian palm oil industry, rather than justselling in bulk."
By having wider packaging options, companies can also tap a wider range ofusers and command more stable profit margins.
"For (MM Vitaoils), our extensive packaging range allows us to average outour margins because we have a broader customer base and different levelsof 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, Mazlansaid.
He added that the lack of value addition was partly the cause of palmoil's steep price discount to rival oils.
Palm oil is typically sold around $80-$140 a metric ton below the nextcheapest oil, soyoil.
"There will come a day when we have more value added products than bulkproducts. Only then will palm oil be around the same price as soyoil," hesaid.
CPO Price Seen Range-Bound In 2005
Eastern Europe and Central Asia are expected to be key growing markets forpalm oil-based products in the coming years, Mazlan said.
"The former Soviet Union countries are very big. All this while they havebeen depending on domestically grown soft oils. They haven't beenintroduced to palm oil, so this is a big opportunity," he said.
MM Vitaoils is already selling its products to countries in that regionsuch as Russia, Uzbekistan and Kazakhstan.
Meanwhile, Mazlan said he expects CPO prices to stay between MYR1,400 toMYR1,600 for the rest of the year, as the supply and demand scenario isn'texpected to change much in 2005.
The benchmark June CPO futures contract on the Bursa Malaysia Derivativeswas last traded at MYR1,423/ton, up MYR4.
It has largely been hovering between the MYR1,400-MYR1,600 range sincemid-2004.