Oleochemicals
Legitimization in the palm oil industry
Before the 1980s, tallow, an animal fat, was commonly used in cooking, in the making of soap, and as a feedstock for oleochemicals, but palm oil has since taken over those functions as a principal raw material in food, energy, and chemical applications. The palm oil industry grew more than 35 times in the last 50 years, from 2 million t/y total industry output in 1970, to 72 million t/y in 2022. Up to 90% of this capacity comes from just two countries: Indonesia and Malaysia.
The palm oil industry started in Malaysia, but Indonesia gradually took over as the largest producer. GBR spoke to Lee Jia Zhang, the chairman of the Malaysian Oleochemical Manufacturers Group (MOMG), about the roots of the sector: “The ‘chemistry of oil’ probably started before the Second World War, predominantly in Europe, with household names like Henkel, BASF, and Unilever. As palm oil became a much more significant feedstock in the 1980s because it was Kosher, Halal, and more available than its animal-based alternative, the industry shifted from Europe to Malaysia and Indonesia, where the raw material was found. The likes of Henkel and Unilever set up shop in Malaysia in the 1980s and, by the 1990s, the technology became readily available to other companies.”
In the following decades, palm oil biochemistry was both lauded and shamed. A major catalyst for the industry’s growth was the EU’s ruling in 2003 that 5.57% of the bloc’s energy requirements should come from biofuels. This was subsequently increased to 10% by 2020, and then to 32% by 2030. The well-intended policy led to the unregulated growth of palm oil plantations in Indonesia and Malaysia to feed the demand for biofuels. Imports of palm oil designated for biofuels from Southeast Asia to Europe rose almost 400% between 2008 and 2018, according to the International Council on Clean Transportation. The environmental consequences of this uncontrolled rise proved dire. A 2015 report by the EU concluded that the emissions resulting from the destruction of tropical landscapes to grow biofuel crops were three times higher than those resulting from the fossil fuels they replaced.
The controversy did not go unnoticed. Various companies were exposed for unethical practices inculding large-scale deforestation. From advertising the use of palm oil, supermarkets and consumer goods companies backtracked to advertise “no palm oil used” labels. However, many of them have changed their mind again; British supermarket Iceland went back to using palm oil for its own-brand products two years after banning it. Further research showed that palm oil has much better credentials compared to other crops; for instance, it has higher yields and therefore it requires less land compared to sunflower, rapeseed, or coconut oil. Based on Our World in Data, palm oil uses 9% less cropland while producing 36% of the world’s oil, at lower costs. Moreover, deforestation fell back to 2004 levels in Indonesia, according to the Center for International Forestry Research (CIFOR).
Lee Jia Zhang of MOMG believes the conversation on the legitimacy of palm oil has become much more nuanced today, thanks to a greater understanding of both the challenges of palm oil production and its advantages above other crops. “In the early 2000s, there was a bit of denial about the validity of environmental concerns, the industry reacting defensively to accusations around deforestation, for instance, even though some actors gave the industry a bad name (…) The answer is not to remove palm oil but to ensure the palm oil is sustainable,” he said.
The regulations and mechanisms to prove the sustainability of palm oil have not been very clear. The main standard for palm oil certification is the Roundtable on Sustainable Palm Oil (RSPO), a voluntary industry body formed in 2004. About 20% of the combined palm oil industry between Indonesia and Malaysia is RSPO certified, according to MOMG. That means most suppliers, many of which are small landholders, are not certified. But stronger regulation coming from the EU is putting pressure on the industry at large. The EU Renewable Energy Directive (EUDR), drafted in 2018 and passed by the European Parliament in December 2022, requires both suppliers and the state to prove that palm oil, among six other commodities, has not contributed to deforestation, before exporting to Europe. Small palm oil suppliers will have 24 months to comply, while large players were given 18 months.
The other significant change brought by the EU is to ban the use of palm oil (as well as soybean) as a feedstock in the production of biodiesel from this year onwards. Out of Malaysia’s 18 million t/y of crude palm oil (CPO), roughly 70% goes to food, 20% to oleochemicals, and 10% to biodiesels, based on MOMG data. In Indonesia, almost half of the 51.3 million t/y CPO is used in food, 11% in oleochemicals, and almost 40% in biodiesels, based on data from the Center for Indonesian Policy Studies, which means Indonesia will be more affected by the new directive.
Among oleochemical producers, there is a consensus that palm oil should not be used to make biodiesels, which would help improve the reputation of the industry at large. Datuk LC Saw, the president of Evyap Sabun Malaysia, a large oleochemical producer, thinks high-quality palm oil should not be a feedstock for biodiesels when it has more value as a contributor in the food and personal care value chains. Instead, new technologies should be developed to make biodiesels from waste feedstocks. But at the government level, the EUDR has been met with defiance. Malaysia’s deputy prime minister called it “unjust” for it would hurt Malaysia’s rural community and create barriers for Malaysia’s palm oil sector. Indonesia agrees, calling the new rules “protectionist.”
Both countries are adamant to boost demand from other buyers. According to a report published by China Dialogue, Malaysia and Indonesia mandated the inclusion of palm oil-derived biodiesels in fuel mixes, by 20% and 30%, respectively. Exports of palm oil for biodiesels to China and India have also been growing, blunting the relevance of the EU ban. Indonesia is also going forward with policies to encourage domestic demand for palm oil biodiesel (B30). The association representing the oleochemical industry in Indonesia estimates that the B30 program has helped remove 23.3 million t of CO2 in 2020 – this shows palm oil feedstocks continue to be quoted as a greener fossil fuel alternative, repeating a similar rhetoric to what the EU was making 20 years ago.
Article header image courtesy of KLK Oleo