01/07/2014 (The Sun Daily) - Recently, the Performance Management and Delivery Unit (Pemandu) urged more Malaysian plantation companies to venture into downstream activities, a call that is timely but challenging.

With Malaysian oil palm growers facing stronger headwinds – in particular the shortage of land and labour – the need to venture downstream is increasingly imperative.

As downstream activities require different skills from that required for upstream endeavours, this shift could severely test the plantation sector's capacity to adapt to a more demanding business milieu.

Oil palm has already been planted on 5.23 million hectares or 70% of Malaysia's agricultural land, Plantation Industries and Commodities Minister Datuk Seri Douglas Uggah Embas said recently. This suggests the scope for enlarging oil palm hectareage could become increasingly sparse.

Furthermore, Indonesia's rapid expansion in planting oil palm coupled with its plans for continued enlargement could exacerbate the labour constraints Malaysia now faces. Data from Indonesia's Ministry of Agriculture indicate the area planted with oil palm jumped from around four million hectares in 2000 to eight million hectares currently.

By 2020, the archipelago's target is to plant oil palm on 13 million hectares. Achieving this target could mean the number of Indonesians available to work in oil palm plantations in Malaysia could be reduced significantly.

Hiring workers from countries like Myanmar, Nepal and Bangladesh is a short-term palliative, not a cure. Mechanisation offers a better and more permanent solution to address this persistent shortage of labour.

For plantation companies, the critical issue isn't whether they should move downstream, but how this transition can be effected.

That downstream activities offer tremendous profit potential is undeniable. According to Pemandu, margins for some agro-chemicals and bio-lubricants could be as high as 35%.

Agro-chemicals include insecticides and fertilisers. An alternative to petroleum-based lubricants, bio-lubricants (one example is lanolin) are made from renewable sources and often used to protect moving machinery parts against rust and corrosion.

For highly-efficient plantation companies in Malaysia, however, a 40% profit margin is achievable. The problem is such profit margins are attainable only when palm oil prices are high. In contrast, manufacturing companies' profit margins are less volatile.

One potential area of investment is oleo-chemicals. Derived mainly from palm kernel oil, some oleo-chemicals frequently used in daily life include toothpaste and shampoo.

A more promising possibility that deserves consideration is producing Vitamin E tocotrienols from palm oil.

Chemically, Vitamin E comprises two major families – tocopherols and tocotrienols.

Past studies have focused almost entirely on tocopherols. Moreover, alpha-tocopherol equivalent (alpha-TE) is often used as a benchmark for Vitamin E content in foods while the Nutri-Facts website omits all mention of tocotrienols and focuses only on "alpha-tocopherol".

A two-year human clinical study published in the American Heart Association journal, Stroke, suggests Vitamin E tocotrienols derived from palm oil could slow the degeneration of white matter lesions in the brain. Comprising 50% of the brain, white matter is the area of the brain often most affected by strokes.

Despite the documented health benefits of Vitamin E tocotrienols, the biggest problem any would-be manufacturer faces is persuading large numbers of consumers to switch to Vitamin E tocotrienols.

Because palm oil is a commodity, plantation companies may lack the requisite marketing and branding skills. Going head-to-head with the likes of DSM is foolhardy. DSM is the world's largest manufacturer of Vitamin E with massive advertising budgets and a worldwide marketing reach.

Although selling Vitamin E tocotrienols at a discount is a possible option, this could mean many years of sustained patience before a company recovers the cost of its investment. Furthermore, long-term profitability necessitates moving up the value chain.

A better alternative is to identify a niche market where Malaysia enjoys a competitive edge and where global giants have a minimal presence.

Instead of manufacturing generic consumer products, Malaysian plantation companies should focus on halal-certified palm-based Vitamin E tocotrienols.

Malaysia's halal certification is recognised worldwide. This country is well placed to expand its footprint through a broad range of Islamic-certified products – including pharmaceuticals, herbal products, cosmetics and food.

Rising incomes in populous Muslim countries like Indonesia and Turkey suggest the halal-certified market could expand significantly while growing Islamic consciousness in the oil-rich Middle Eastern countries indicate the potential for high-value Islamic products.

A useful case study is the market for Islamic bonds or sukuk. According to Moody's Investor Service, two-thirds of the approximately US$290 billion outstanding sukuk is issued in Malaysia.

Last week, the UK raised £200 million in five-year Islamic bonds, the first non-Muslim sovereign issuer of sukuk. Also noteworthy, investors bid more than 10 times the amount offered.

This month alone, two conventional banks – France's Societe Generale and Japan's Bank of Tokyo-Mitsubishi UFJ – announced the sale of Malaysian sukuk.

Success in developing the sukuk market can and should be replicated by Malaysian companies manufacturing halal-certified palm oil-based items.

Opinions expressed in this article are the personal views of the writer and should not be attributed to any other organisation she is connected with. She can be contacted at siokchoo@thesundaily.com