12/09/05 KUALA LUMPUR (Dow Jones)--A boom in the oleochemicals industry isboosting consumption of palm kernel oil in Malaysia, fueling a surge inprices.

Demand has been so good that the country, though the world's biggest palmkernel oil producer, needs to import from neighboring countries, a seniorofficial at a Malaysian trading company said.

"The whole world is using more and more oleochemicals, which are found inthings like shampoo and soaps," Alex Oh, marketing manager of YongxingEdible Oil Sdn. Bhd., said in an interview.

"Since Malaysia has one of the world's biggest oleochemicals (operations),demand for palm kernel oil has been very good."

Malaysia's exports of oleochemical products in 2004 totaled 1.77 millionmetric tons valued around MYR5.0 billion, up sharply from 1.57 milliontons valued at MYR3.85 billion in the previous year, according to datafrom the Malaysian Palm Oil Board, or MPOB.

In the past, large oleochemical producers would use around 1,000 tons ofpalm kernel oil a day, Oh said.

"Now, they are using around 2,000 tons a day and it's still not enough,"he said.

Palm kernel oil is one of two types of oil derived from the fruit of theoil palm tree.

In a conventional milling process, the mesocarp of the fruit is pressed toextract the more widely-known palm oil. That leaves the kernel, which isthen further processed and crushed to obtain palm kernel oil.

Unlike palm oil, one of the world's main sources of cooking oil, palmkernel oil is more highly saturated, much like coconut oil, making itsuitable for use in the oleochemicals industry.

Supply of palm kernel oil isn't as ample as that of palm oil since yieldsfor the two oils differ greatly.

Malaysia's oil palm area of 3.88 million hectares in 2004 yielded around14 million tons of crude palm oil and only 1.64 million tons of crude palmkernel oil.

Rising Palm Kernel Oil Imports

Therefore, growing demand amid limited supply has boosted palm kernel oilprices in recent years.

A decade ago, palm kernel oil prices would at most be about MYR200-MYR300above CPO prices, Oh said.

"Nowadays, we can see a premium of about MYR700. Sometimes, pricingdifference can be even as much as nearly MYR1,000," he said.

To feed Malaysia's growing oleochemicals industry, palm kernel oil importsfrom neighboring Thailand and Indonesia have been rising, Oh said.

The MPOB has only allowed five trading companies in Malaysia to holdlicenses to import palm kernel oil, and Yongxing is one of thesecompanies, he said.

Prior to winning the license in 2001, Yongxing was primarily a transportcompany.

"As far as we know, we are the only ones (among the five tradingcompanies) that are actively doing it (importing)," Oh said.

Although there is clearly market demand for palm kernel oil, the businessof importing the oil isn't as straightforward as it may seem due to strictquality standards in Malaysia.

For example, the accepted level of shell and dirt content in palm kernelsis about 6%, but those found in Indonesia and Thailand, where standardsaren't as strict, can exceed 10%, Oh said.

"That's why if you want to buy from them, you need to send someone thereto actually (oversee) the plant so that their product will meet yourspecifications," he said.

Staying Away From China

Besides the trading of palm kernel oil, Yongxing also makes cooking oilfor the domestic and overseas markets.

Currently, the company counts Australia, New Zealand, the Philippines,Hong Kong, Italy, the Middle East and Africa as among its major exportdestinations.

Oh said he sees vast potential for palm oil in both the Middle East andAfrican regions.

Malaysia's status as a Muslim nation is helping to draw support for thecountry's products from Middle East buyers.

In Africa, increasing demand for higher quality oils is also boostinginterest in palm oil.

"Although they have their own palm oil there, when we show them ourproduct, they often ask why it is so different," he said.

Palm oil is already being produced in parts of Africa, but awareness aboutprocessing techniques and quality standards were still lacking, he said.

"In fact, I have even seen cases where people directly use CPO, withoutprocessing, to cook," he said.

For now, Oh said his company wasn't keen to tap the Chinese market despiteconstant talk about China's seemingly insatiable appetite for importedgoods, including commodities.

"These days, of course everyone is talking about China. But we feel it isa bit difficult because the thinking of the people there is very differentfrom us here in Malaysia," Oh said.

There is a perception in Malaysia that doing business in China isdifficult due to cultural and other differences.