The Economics of the Malaysian Palm Oil Industry and Its Biodiesel Potential

The Economics of the Malaysian Palm Oil Industry and Its Biodiesel PotentialKenneth R. Szulczyk, Ph.D.Convention Center, UUMDecember 4, 2012ContentsIntroductionPalm oil treesPlantation land usePalm oil uses and productsOil palm plantation waste productsSubstituting biodiesel for diesel fuelPalm oil biodiesel production and useTallow and yellow grease as cheap oil sourcesConclusion

IntroductionGovernment uses the palm oil industry for economic growth and developmentFederal Land Development Authority (FELDA)Helped 90,000 settlers with their families to own a palm oil plantationCreates jobs in rural communitiesFELDA Provides technical assistanceOwns facilities to process and sell the settlers cropsOffers loans for home constructionIntroductionPalm oil industryMalaysia possesses the manufacturing to create high-valued products Important source for foreign-currency earningsSubsequently, most products are exported$80.4 billion ringgits of exports in 2011Roughly 13.7% of Malaysias GDPIntroductionMalaysia passed the Malaysian Biofuel Industry Act in 2007The distributors for diesel must add a minimum of 5% biodiesel by volume (or B5)Malaysia is a developing countryKyoto Protocol - Malaysia is not required to lower its greenhouse-gas emissions to its 1990 levelNote the agreement only slows down greenhouse-gas emissions and does not reverse itPalm Oil TreesThe two largest producers of palm oil are Indonesia and MalaysiaThe British brought the palm oil trees to Malaysia in the 1870sUsed in gardens and landscapingThe palm oil tree originates from West AfricaThe life of a palm oil tree exceeds 200 yearsEconomic life ranges between 20 and 25 yearsPalm Oil TreesEach palm oil fruit has two sources of oilPalm oil from the mesocarp, or pulp that surrounds the kernelPalm kernel oil the oil from the kernel

Palm Oil TreesBoth oils have different characteristicsDifferent usesPalm kernel oil is more saturated than palm oilSaturated means the oil is a solid at room temperature

Palm oil trees yield the greatest oil yields per hectare of landPalm Oil TreesWorlds Oil Production in 2010Production(tonnes/year)Area Harvested(hectares/year)Yield(tonnes/hectare/year)Coconut (copra) oil3,987,56311,376,6980.3505Maize oil2,321,544161,765,3880.0144Palm kernel oil5,688,55915,410,2620.3691Palm oil43,573,47015,410,2622.8276Rapeseed oil22,774,07431,640,7560.7198Safflower oil131,959772,7050.1708Soybean oil39,840,137102,556,3100.3885Sunflower oil12,698,80723,113,7850.5494Palm Oil TreesByproductsOnce the oil is extracted from the seeds, the seeds contain high levels of proteinSeed meal or cake is used in animal feedsCorn (or maize)The most widely grownYields the lowest oil Producers use corn to extract the starchStarch is used:Ethanol for gasoline in the United StatesHigh-fructose corn syrup an artificial substitute for cane sugar in the U.S.

Plantation Land UseMalaysia grows cocoa, rubber, and coconut treesPlantation owners are planting more palm oil and decreasing cocoa, rubber, and coconutsEconomic exposureUsually countries diversify their industries to help protect themselves from rapid changes in the marketMalaysia is expanding one industry at the expense of othersInternational commodity prices can be extremely volatilePlantation Land Use

The total area planted in Malaysia in hectaresPlantation Land Use

The international price in U.S. $s per tonnePlantation Land UseGreenhouse gases trap the suns energy as heat, causing the earth to become warmerGlobal Warming Potential (GWP)Carbon dioxide is defined as 1 GWPMethane has 16 GWPOne tonne of methane traps 16 times the heat of one-tonne of carbon dioxide Nitrous oxide has 298 GWPOne tonne of nitrous oxide traps 298 times the heat of one-tonne of carbon dioxideWater vapor has no GWP; sensitive to temperature

Plantation Land UsePlantation owners raise buffaloes, cattle, and sheep on landAnimals:Reduce weeding and herbicide useEnteric fermentation animals produce methane gases as their digestive system converts grass into foodManure used as a fertilizerBoosts tree yieldsEmits nitrous oxide and methane gasPlantation Land UseConcernsPristine rainforests are converted into tree plantationsLoss of biodiversity and wildlife habitatsRainforests store larges amounts of carbon in the soilBacteria and roots of palm oil trees releases the carbon into the atmosphere as carbon dioxideU.S. Environmental Protection Agency ruled against importing palm oil biodiesel as a renewable fuelHowever, carbon emissions are highly variablePalm Oil Uses and ProductsMalaysia refines the palm oil into a variety of productsPalm oilPalm olein a liquid oil at room temperatureUsed to fry foodsOil is thermally stable, no bad odors, and little oxidationPalm stearin more solid at room temperaturePalm oil acid distillates leftover from refiningUsed in animal feeds, Vitamin E, and oleochemicalsPalm Oil Uses and ProductsOil ProductProductsPalm oil Cooking oilsMargarine, reduced fat spread, shortening, and vanaspati Fried foodsDoughnuts, French fries, potato chips, and nuts Non-fried foodsBaked goods, non-dairy creamers for coffee, tea, and cocoa mixes, condensed milk, dry and canned soup mixes, ice cream, instant noodles, mayonnaise, and salad dressings OtherSoap noodlesPalm stearinShortening, margarines, vanaspati, and pastry and bakery productsPalm oleinMargarine and cooking oilPalm fatty acid distillateAnimal feed, soap, oleochemicals, and Vitamin EPalm Oil Uses and ProductsProducers use a press to extract palm kernel oil from the kernelProductsPalm kernel oilPalm kernel oleinPalm kernel stearinPalm kernel cake remains of kernelUsed in animal feedsIndustry presses the cake into expeller pelletsPalm Oil Uses and ProductsOil ProductProductsPalm kernel oilCocoa butter substitute, confectionery products, detergents, ice cream, margarine, oleochemicals, and soap noodlesPalm kernel stearinCocoa butter substitute, confectionery products, nondairy coffee creamers, filled milk, and non-hydrogenated trans-fat free margarinePalm kernel oleinIce cream and soap noodlesPalm kernel cakeCattle, catfish, poultry, and swine feedsPalm Oil Uses and ProductsMany products are listed multiple times in the tableSoap noodles raw material to make soapComposed of 80% palm oil and 20% palm kernel oilMargarine could be made from a variety of oilsDifferent oils yield different characteristicsPalm kernel stearin could make trans-fat free margarinePalm Oil Uses and ProductsPalm kernel stearinThe most expensive oil from the oil palmProducers use the stearin to replace cocoa butter in chocolatesCocoa butter is more expensive than the stearinMalaysia exports chocolate productsIndustry could reduce chocolate prices, making Malaysias chocolate exports more competitivePalm kernel stearin is solid at room temperatureFood producers hydrogenate vegetable oils Hydrogenated oils are trans fats, and could lead to health problemsPalm kernel stearin is natural

Palm Oil Uses and ProductsThe international price in U.S. $s per tonne

Palm Oil Uses and ProductsCharacteristicsPalm kernel oil is usually more expensive than palm oilPalm oil stearin is the cheapest oilExpeller pellets has the lowest priceSome claim the palm oil industry is recession proofProminent dip in prices after the 2007 Great Recession struck the world

Oil Palm Plantation Waste ProductsPalm oil mills use water in processingThey discharge an effluent or sludge, containing organic materialCannot be discharged into rivers and lakesBacteria breaks down the material, consuming the oxygen in the waterLack of oxygen kills the water life and fish

Oil Palm Plantation Waste ProductsPalm oil mills could collect the sludge into ponds and let earthworms break down the sludge into vermicompostThen the mill uses the rich organic material to fertilize the trees or sell to consumersThe bacteria creates methane gas, or biogasPonds should have a covered roof to collect the biogas If the mill releases the methane gas into the atmosphere, it lessens the efficiency for biodiesel to recycle greenhouse gasesThe U.S. Environmental Protection Agency cited this in their decisionOil Palm Plantation Waste ProductsPalm oil mills collect empty fruit bunches, fiber, and shellsThe mill could theoretically:Burn the wastes to produce steam and bioelectricity10 mills out of 360 do thisIf all wastes were burned, then Malaysia could generate approx. 11.8 megawatts of electricityThis is a small fraction of electricity usageConvert the wastes into sugarsUse bacteria to convert sugars into butanolUse lignocellulosic fermentation to convert sugars into ethanolButanol and ethanol could be mixed with gasoline

Substituting Biodiesel for Diesel FuelPalm oil, especially palm stearin would be the cheapest to use in biodieselPalm oil cannot be used in diesel engines directlyThe oil is too viscousFouls the fuel injectorsLeads to carbon buildup in engineThe mill converts the palm oil into methyl-esters, or biodieselCreates glycerol as a byproductGlycerol is used in cosmetics, cough syrups, foods, haircare products, mouthwashes, paints, pharmaceutical products, shaving creams, skincare products, soap, toothpaste, and water-based lubricants

Substituting Biodiesel for Diesel Fuel

Substituting Biodiesel for Diesel FuelThe use of fossil fuels releases stored carbon from the ground into the atmosphereBiodiesel recycles carbon dioxidePalm oil trees convert carbon dioxide into oilsA refinery converts oils into biodieselThen vehicles with diesel fuel engines burn the biodiesel, converting it to carbon dioxideThus, wide-scale use of biodiesel could lower greenhouse-gas emissionsSubstituting Biodiesel for Diesel Fuel

Palm Oil Biodiesel Production and UseMalaysia The public consumed 5.8 billion liters of diesel in transportation in 2009The refineries produced 10.6 billion liters of dieselRoughly half is exportedIf all palm oil was converted into biodiesel, then palm biodiesel would supply 19.7 billion litersMalaysia could offset its entire diesel fuel with biodieselMalaysia would have plenty of biodiesel leftover for export or consumption

Palm Oil Biodiesel Production and UseProblemsMalaysia has no substitute for gasolineMalaysia would still refine petroleum into gasoline and dieselEthanol or butanol from waste products would not be enoughPetroleum exports are a source of foreign-currency earningsPrice of palm oil is too greatMalaysian government subsidizes its transportation fuelsGovernment would pay greater subsidy, if petroleum price risesGasoline is pegged at $0.855 per literDiesel is pegged at $0.845 per literPalm oil biodiesel sold for $1.49 per liter in January 2011

Palm Oil Biodiesel Production and UseMalaysia has the capacity to produce 3.8 billion liters of biodieselHowever, Malaysia produces little biodieselMalaysia wanted to sell biodiesel to Europe and United StatesThe U.S. EPA ruled the palm biodiesel only lowers greenhouse gas emissions by 17%, and not at least 20%, which is required for renewable fuel importU.S. refineries would not get credit for the national Renewable Fuel Standards if they use palm biodieselPalm biodiesels price would need to be lower than diesel fuel for producers to use it in the U.S.The European Union imposed tariffs on the imports of Malaysian palm biodieselPossibly protecting its rapeseed biodiesel industryCould be a form of trade discrimination?

Cheap Sources for BiodieselPotential cheap sources for biodieselYellow grease old cooking oil from restaurants and food producersBrown grease cooking oil trapped in a facilitys wastewaterTallow fat leftover from the cattle, poultry, and swine processingCheap Sources for BiodieselMalaysia produced 50,000 tonnes of cooking oil and tallow in 2005The industry could produce theoretically 43.9 million liters of biodieselProblemYellow grease and tallow are not freeYellow grease costs $590 per tonne in 2010 in the U.S.Biodiesel would costs $0.67 per literIndustries use yellow grease to make animal feeds, clothes, cosmetics, detergents, lubricants, paints, plastics, pet food, rubber, and soapTallow is used in animal feeds and soapConclusionPalm oil industry is important industry for MalaysiaCreates jobs in rural communitiesRecycles greenhouse gasesMalaysia produces enough palm oil to offset its diesel consumption entirelyIf yellow grease price is comparable to the U.S., then yellow grease cooking oil could be feasibleProblemsU.S. and European Union prevent the importing of palm oil biodieselPalm biodiesel is too expensive to use as a transportation fuel, unless the Malaysian government wants to subsidize it heavily