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

1. The Economics of the Malaysian Palm Oil Industry and Its Biodiesel Potential Kenneth R. Szulczyk, Ph.D. Convention Center, UUM December 4, 2012

2. Contents • Introduction • Palm oil trees • Plantation land use • Palm oil uses and products • Oil palm plantation waste products • Substituting biodiesel for diesel fuel • Palm oil biodiesel production and use • Tallow and yellow grease as cheap oil sources • Conclusion

3. Introduction • Government uses the palm oil industry for economic growth and development • Federal Land Development Authority (FELDA) • Helped 90,000 settlers with their families to own a palm oil plantation • Creates jobs in rural communities • FELDA • Provides technical assistance • Owns facilities to process and sell the settlers’ crops • Offers loans for home construction

4. Introduction • Palm oil industry • Malaysia possesses the manufacturing to create high-valued products • Important source for foreign-currency earnings • Subsequently, most products are exported • $80.4 billion ringgits of exports in 2011 • Roughly 13.7% of Malaysia’s GDP

5. Introduction • Malaysia passed the Malaysian Biofuel Industry Act in 2007 • The distributors for diesel must add a minimum of 5% biodiesel by volume (or B5) • Malaysia is a developing country • Kyoto Protocol - Malaysia is not required to lower its greenhouse-gas emissions to its 1990 level • Note – the agreement only slows down greenhouse-gas emissions and does not reverse it

6. Palm Oil Trees • The two largest producers of palm oil are Indonesia and Malaysia • The British brought the palm oil trees to Malaysia in the 1870s • Used in gardens and landscaping • The palm oil tree originates from West Africa • The life of a palm oil tree exceeds 200 years • Economic life ranges between 20 and 25 years

7. Palm Oil Trees • Each palm oil fruit has two sources of oil • Palm oil – from the mesocarp, or pulp that surrounds the kernel • Palm kernel oil – the oil from the kernel

8. Palm Oil Trees • Both oils have different characteristics • Different uses • Palm kernel oil is more saturated than palm oil • Saturated means the oil is a solid at room temperature • Palm oil trees yield the greatest oil yields per hectare of land

9. Palm Oil Trees

10. Palm Oil Trees • Byproducts • Once the oil is extracted from the seeds, the seeds contain high levels of protein • Seed meal or cake is used in animal feeds • Corn (or maize) • The most widely grown • Yields the lowest oil • Producers use corn to extract the starch • Starch is used: • Ethanol for gasoline in the United States • High-fructose corn syrup – an artificial substitute for cane sugar in the U.S.

11. Plantation Land Use • Malaysia grows cocoa, rubber, and coconut trees • Plantation owners are planting more palm oil and decreasing cocoa, rubber, and coconuts • Economic exposure • Usually countries diversify their industries to help protect themselves from rapid changes in the market • Malaysia is expanding one industry at the expense of others • International commodity prices can be extremely volatile

12. Plantation Land Use The total area planted in Malaysia in hectares

13. Plantation Land Use The international price in U.S. $s per tonne

14. Plantation Land Use • Greenhouse gases – trap the sun’s energy as heat, causing the earth to become warmer • Global Warming Potential (GWP) • Carbon dioxide is defined as 1 GWP • Methane has 16 GWP • One tonne of methane traps 16 times the heat of one-tonne of carbon dioxide • Nitrous oxide has 298 GWP • One tonne of nitrous oxide traps 298 times the heat of one-tonne of carbon dioxide • Water vapor has no GWP; sensitive to temperature

15. Plantation Land Use • Plantation owners raise buffaloes, cattle, and sheep on land • Animals: • Reduce weeding and herbicide use • Enteric fermentation – animals produce methane gases as their digestive system converts grass into food • Manure – used as a fertilizer • Boosts tree yields • Emits nitrous oxide and methane gas

16. Plantation Land Use • Concerns • Pristine rainforests are converted into tree plantations • Loss of biodiversity and wildlife habitats • Rainforests store larges amounts of carbon in the soil • Bacteria and roots of palm oil trees releases the carbon into the atmosphere as carbon dioxide • U.S. Environmental Protection Agency ruled against importing palm oil biodiesel as a renewable fuel • However, carbon emissions are highly variable

17. Palm Oil Uses and Products • Malaysia refines the palm oil into a variety of products • Palm oil • Palm olein – a liquid oil at room temperature • Used to fry foods • Oil is thermally stable, no bad odors, and little oxidation • Palm stearin – more solid at room temperature • Palm oil acid distillates – leftover from refining • Used in animal feeds, Vitamin E, and oleochemicals

18. Palm Oil Uses and Products

19. Palm Oil Uses and Products • Producers use a press to extract palm kernel oil from the kernel • Products • Palm kernel oil • Palm kernel olein • Palm kernel stearin • Palm kernel cake – remains of kernel • Used in animal feeds • Industry presses the cake into expeller pellets

20. Palm Oil Uses and Products

21. Palm Oil Uses and Products • Many products are listed multiple times in the table • Soap noodles – raw material to make soap • Composed of 80% palm oil and 20% palm kernel oil • Margarine – could be made from a variety of oils • Different oils yield different characteristics • Palm kernel stearin could make trans-fat free margarine

22. Palm Oil Uses and Products • Palm kernel stearin • The most expensive oil from the oil palm • Producers use the stearin to replace cocoa butter in chocolates • Cocoa butter is more expensive than the stearin • Malaysia exports chocolate products • Industry could reduce chocolate prices, making Malaysia’s chocolate exports more competitive • Palm kernel stearin is solid at room temperature • Food producers hydrogenate vegetable oils • Hydrogenated oils are trans fats, and could lead to health problems • Palm kernel stearin is natural

23. Palm Oil Uses and Products The international price in U.S. $s per tonne

24. Palm Oil Uses and Products • Characteristics • Palm kernel oil is usually more expensive than palm oil • Palm oil stearin is the cheapest oil • Expeller pellets has the lowest price • Some claim the palm oil industry is recession proof • Prominent dip in prices after the 2007 Great Recession struck the world

25. Oil Palm Plantation Waste Products • Palm oil mills use water in processing • They discharge an effluent or sludge, containing organic material • Cannot be discharged into rivers and lakes • Bacteria breaks down the material, consuming the oxygen in the water • Lack of oxygen kills the water life and fish

26. Oil Palm Plantation Waste Products • Palm oil mills could collect the sludge into ponds and let earthworms break down the sludge into vermicompost • Then the mill uses the rich organic material to fertilize the trees or sell to consumers • The bacteria creates methane gas, or biogas • Ponds 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 gases • The U.S. Environmental Protection Agency cited this in their decision

27. Oil Palm Plantation Waste Products • Palm oil mills collect empty fruit bunches, fiber, and shells • The mill could theoretically: • Burn the wastes to produce steam and bioelectricity • 10 mills out of 360 do this • If all wastes were burned, then Malaysia could generate approx. 11.8 megawatts of electricity • This is a small fraction of electricity usage • Convert the wastes into sugars • Use bacteria to convert sugars into butanol • Use lignocellulosicfermentation to convert sugars into ethanol • Butanol and ethanol could be mixed with gasoline

28. Substituting Biodiesel for Diesel Fuel • Palm oil, especially palm stearin would be the cheapest to use in biodiesel • Palm oil cannot be used in diesel engines directly • The oil is too viscous • Fouls the fuel injectors • Leads to carbon buildup in engine • The mill converts the palm oil into methyl-esters, or biodiesel • Creates glycerol as a byproduct • Glycerol is used in cosmetics, cough syrups, foods, haircare products, mouthwashes, paints, pharmaceutical products, shaving creams, skincare products, soap, toothpaste, and water-based lubricants

29. Substituting Biodiesel for Diesel Fuel

30. Substituting Biodiesel for Diesel Fuel • The use of fossil fuels releases stored carbon from the ground into the atmosphere • Biodiesel recycles carbon dioxide • Palm oil trees convert carbon dioxide into oils • A refinery converts oils into biodiesel • Then vehicles with diesel fuel engines burn the biodiesel, converting it to carbon dioxide • Thus, wide-scale use of biodiesel could lower greenhouse-gas emissions

31. Substituting Biodiesel for Diesel Fuel

32. Palm Oil Biodiesel Production and Use • Malaysia • The public consumed 5.8 billion liters of diesel in transportation in 2009 • The refineries produced 10.6 billion liters of diesel • Roughly half is exported • If all palm oil was converted into biodiesel, then palm biodiesel would supply 19.7 billion liters • Malaysia could offset its entire diesel fuel with biodiesel • Malaysia would have plenty of biodiesel leftover for export or consumption

33. Palm Oil Biodiesel Production and Use • Problems • Malaysia has no substitute for gasoline • Malaysia would still refine petroleum into gasoline and diesel • Ethanol or butanol from waste products would not be enough • Petroleum exports are a source of foreign-currency earnings • Price of palm oil is too great • Malaysian government subsidizes its transportation fuels • Government would pay greater subsidy, if petroleum price rises • Gasoline is pegged at $0.855 per liter • Diesel is pegged at $0.845 per liter • Palm oil biodiesel sold for $1.49 per liter in January 2011

34. Palm Oil Biodiesel Production and Use • Malaysia has the capacity to produce 3.8 billion liters of biodiesel • However, Malaysia produces little biodiesel • Malaysia wanted to sell biodiesel to Europe and United States • The 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 import • U.S. refineries would not get credit for the national Renewable Fuel Standards if they use palm biodiesel • Palm biodiesel’s 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 biodiesel • Possibly protecting its rapeseed biodiesel industry • Could be a form of trade discrimination?

35. Cheap Sources for Biodiesel • Potential cheap sources for biodiesel • Yellow grease – old cooking oil from restaurants and food producers • Brown grease – cooking oil trapped in a facility’s wastewater • Tallow – fat leftover from the cattle, poultry, and swine processing

36. Cheap Sources for Biodiesel • Malaysia produced 50,000 tonnes of cooking oil and tallow in 2005 • The industry could produce theoretically 43.9 million liters of biodiesel • Problem • Yellow grease and tallow are not free • Yellow grease costs $590 per tonne in 2010 in the U.S. • Biodiesel would costs $0.67 per liter • Industries use yellow grease to make animal feeds, clothes, cosmetics, detergents, lubricants, paints, plastics, pet food, rubber, and soap • Tallow is used in animal feeds and soap

37. Conclusion • Palm oil industry is important industry for Malaysia • Creates jobs in rural communities • Recycles greenhouse gases • Malaysia produces enough palm oil to offset its diesel consumption entirely • If yellow grease price is comparable to the U.S., then yellow grease cooking oil could be feasible • Problems • U.S. and European Union prevent the importing of palm oil biodiesel • Palm biodiesel is too expensive to use as a transportation fuel, unless the Malaysian government wants to subsidize it heavily