Malaysian
Palm Oil Sector
Ensuring a Healthy
Supply Chain
for the Palm Oil
Industry
June 2004
Amitabha Guha
arabis@arabis.org
ARAB
Agricultural Research
&
Advisory Bureau
© Copyright ARAB
2004.
INTRODUCTION
The
Current Situation in the Palm Oil Sector
Currently, the Palm Oil Supply Chain structure is characterized by:
·
A Growing
upstream sector that is now in a very strong position (strong demand pull).
·
A Processing
(refining) sector that in the current state is the weakest link in the palm
oil supply chain - and it is weakening further!
[Excess capacities in both local and export markets]
·
A Manufacturing
sector that is quite healthy currently but will weaken unless their products
are strongly branded. [Distributors / Retailers will squeeze them].
·
A Distribution
& Retail sector that is currently quite healthy and will become much more
so - in time it will dominate and control the rest of the supply chain as the
market matures and oil demand flattens out in the developed countries!
The existing Supply Chain status will however
change over time with the Distributors / Retailers becoming even stronger at
the expense of the upstream - they will also source palm oil directly from
Manufacturers at the value (and/or price) expense of upstream Growers /
Processors (unless Manufacturers are integrated w/ Growers / Processors).
The
Palm Oil Supply Chain ...
Growers Processors/Refiners Manufacturers Distributors Retailers
Status:
Evidence of Industry Trends
/ Patterns ...
- Distributors
/ Retailers gradually accumulating pricing power over the Supply Chain
pricing power currently limited by strong demand
pull for basic food products and edible oils / soaps
but will get stronger as demand pull moderates
over the next 20 yrs.
- Product
Manufacturing plants (soaps/detergents) are moving to
i.e. to where there is a large population and
low manufacturing / labour cost base
ex all 3 Unilever mfg plants in M'sia have left
the country during 2001/02
- Their
suppliers - oleochem plants have already started following them
ex plants manufacturing fatty acids, glycerols,
esters etc.
- The
Refiners are in trouble - getting squeezed by both Growers and Oleochem /
Product Manufacturers
all local refiners feeling tight margins under
an excess capacity environment
- The
Growers currently capturing most of the margins !
due to strong demand for non-value added oils.
Past Critical Success
Factors
- The
S E Asian / M'sian Palm Oil Industry has been successful for the last 25
yrs because:
Ÿ
we are more efficient upstream producers
compared to the temperate oil seed growers
Ÿ
global DEMAND growth is Population and Income
driven (both rising fast) especially in
Ÿ
Threats:-
labour & land shortage, yield stagnation, inability
to modify oil characteristics / establish a brand ... INABILITY TO ADD VALUE to
Commodity !
Summary of Industry Trends
- currently
the upstream is capturing almost all the value of palm oil
- but
the downstream will from now gradually be capturing more of the value -
starting w/ the developed country markets and later the less developed
countries
- this
trend is likely to continue until the retailers / distributors capture all
the margins (see box below).
Ÿ
similar to how cocoa/tea and rubber growers have
now become "slave" producers to manufacturers and retailers.
Supply Chain Management
Supply Chain Management (SCM)
involves the coordination of production and distribution activities across
multiple organizations and geographic locations / markets.
Its goal
to maximize customer value and producer
profit by optimizing the operations of the entire chain rather
than of a single organization i.e. to achieve a health supply chain.
In the agri-food sector, supply chain management has
traditionally been driven by product perishability and/or food safety concerns.
More recently, market requirements for smaller markets are being identified and
agri-food production is being targeted at progressively smaller (but higher
value) markets. By focusing on niches and moving out of undifferentiated
commodity markets, supply chain participants are able to extract maximum value
(or prevent loss of value!) from their products and reduce operating risk.
For forward thinking producers of palm oil (or other
commodities) this value retention strategy will represent a drastic
change from past thinking, experience and practices
value protection and enhancement takes
precedence over price protection and enhancement !
Note: Advances in biotechnology promise even greater
ability to tailor agricultural product characteristics to specific markets and
demand a greater ability to manage products from design, through production and
distribution to the ultimate consumer and his tastes/desires.
SCM revolves around four key management activities
determining
market requirements,
establishing and
managing supply chain relationships (necessary to control value),
managing
information flows and
managing material flows.
The Value Pie:
Natural Trend
the value of a commodity shrinks over
time
To counter this
value has to be added to the raw commodity
(continuously!)
Developing
a healthy supply chain
for the palm oil sector would basically mean
Keeping abreast of global market and
consumer changes and trends
Strengthening inward & outward
linkages with the global marketplace
o
becoming part of national, regional &
global supply chains
o
forming alliances and partnerships for
production, supply and distribution, both within Msia / Isia and in overseas
markets, and with both local and foreign players
Developing new palm based manufactured
products and marketing brands with appeal beyond domestic market
Taking advantage of advances in trade
liberalization
Developing strategies to deal with
reality of the global marketplace, which best suits the development of a
healthy supply chain
Next Steps -
for the Msian Palm Oil Industry
...
§
Strategies
Ÿ
the only way for the Msian palm oil industry to
ensure that the supply chain remains
healthy and equitable over the longer term is to integrate the growing and the
manufacturing - and buy into both the distribution & retailing / marketing
especially in our key export markets (
§
Implementation
Ÿ
upstream plantation companies should integrate
into refining and/or force refiners to get into food manufacturing
Ÿ
refiners should be encouraged to get into or buy
into manufacturers of food products (especially branded products) in both
local and export markets
Ÿ
both plantations and refiner companies should jointly
buy into distribution networks in Less Developed Countries
- LDC's (
buy into retailers in Developed Countries - DC's
(supermarkets / hypermarkets) ex. Wal*Mart, Carrefour, Royal Ahold, Tesco,
Aeon, Dairy Farm International etc.
1. STRATEGIES
- Integrate
the Production, Refining & Manufacturing sectors as much as possible
to:
Ÿ
share the end product value more equitably
amongst all industry participants
Ÿ
avoid the current margin squeeze in refiners by
upstream growers and downstream food manufacturers
Ÿ
avoid becoming like the "chocolate or
coffee economy" that is characterized by low value capturing producers
& processors in underdeveloped / developing countries feeding high value
capturing manufacturers distributors / retailers in developed countries !
Ÿ
allow the
whole industry (supply chain) to:
Ÿ
react faster and in sync to changes in demand of
edible oil containing food products
Ÿ
create new value additions (and value protection
mechanisms) to existing food products and to create new oil based products
(branded?)
Ÿ
take collective control of developing and
controlling markets (distribution systems, retailing / pricing etc.) - i.e. to
have the industry drive the market instead of being driven by the market !
2. IMPLEMENTATION
- Integrate the Supply Chain (at upstream) and buy into
the downstream product manufacturing and into distribution / retailing in
consumer markets:
Ÿ
plantation / growers to integrate only into refining operations
that have started going into food / value added product manufacturing
Ÿ
plantation / growers to collectively invest in
Ÿ
LDC's (
Ÿ
DC's (US / EU) - by buying into the retail
systems of these markets (which already have an efficient distribution system)
Ÿ Note:
the existing
numerous margin squeezed refiners (both locally and in export markets) is of
value to palm oil producers only when they get into manufacturing to produce
value added oil containing products (preferably branded) for downstream distribution
and retailing (so that the upstream supply chain can protect / build the value
of the oil and get a fair/better share of this value)
Ÿ
locate or base all such integrated companies
(growing to refining to food manufacturing) in
Ÿ
sharing of R&D costs / info to develop products
and product branding
Ÿ
sharing of resources in setting up Marketing and
Market Research Bodies in key consumer markets
Ÿ
access to M'sia's excellent infrastructure
networks (roads, shipping etc.) when moving raw field material for processing
and manufacture before distribution to markets.
Ÿ
retain most of value additions into the end
product in M'sia /
Ÿ
then have such integrated companies market
and retail directly to consumers (locally / overseas) :-
Ÿ
by buying distribution / retail networks in
major markets
Ÿ
Benefit:
Ÿ
allows the whole integrated upstream supply
chain to face consumers with greater bargaining strength for better prices
Ÿ
understand demand trends and customer tastes better
to continuously come up with new differentiated products
The Main
Considerations ...
The overall strategy ...
Ÿ
we should
be selling / marketing a high value oil containing Branded Product out of M'sia
not a raw commodity for others to value add to
and/or to squeeze
margins off M'sian growers/processors/refiners
Ÿ in LDC's (Less Developed Countries) - we should primarily be controlling the distribution of these branded products
Ÿ
in DC's (Developed Countries) - we should primarily
be controlling the retailing of these branded products
Other Considerations
...
- Complements &
Substitutes -
- oil could be complemented / blended with other
oils that
prevents solidification at cooler temp.'s
give it a localized taste
allows for better oil properties ex blending w/ neem / citronella or tea tree oil for a better healthier oil
develop specialty oils and brands high Vitamin E /
tocotrienol oils (ex. Carotino palm oil)
Note Innovations in the
Pipeline ...
§
Production
Sector:
Ÿ
New harvest tech to lower labour inputs
Ÿ
A lot of benefit from increase yields currently
(since upstream margins are currently huge!)
Ÿ
but in future
- not much point in increasing production of FFB if it drops prices
(inelastic Supply-Demand curves) in a mature commodity market
Ÿ
witness price crashing once stock levels
reached > 1 mill tons oil in 2001
§
Process /
Refining Sector:
Ÿ
- Not
much change in tech here ? -
§
Manufacturing
Sector:
Ÿ
Lots of potential ... lots of "new"
food and non-food products that we can come up with, brand and pass (channel)
thru the distributor/retailers to consumers
Ÿ
blended cooking oils to cater to localized
customer taste preferences
Ÿ
ice cream (Nestle, Unilever), frozen cakes /
pastries (Bluebird)
Ÿ
many other food products
Ÿ
soaps / detergents and industrial greases
To Sum
Up ...
In
summary,
- The Palm Oil Industry is gradually reshaping into :
- a currently very strong but gradually weakening Producer (grower) sector;
- and
very weak Process (refining) sector - that will further weaken
Ÿ
a currently somewhat strong (but weakening)
downstream oleochemical and food / non-food manufacturing sector
Ÿ
a fast strengthening Distribution and Retail sector
θ a situation which will
eventually lead to distributors / retailers of end products gaining total
strength in setting the value / price of our raw palm oil !
Ÿ
To ensure the health of our palm oil sector, we
need to URGENTLY...
Realign and Restructure the
Supply Chain to maximize the equivalent value
of crude oil (as defined by what the
consumer pays for it !) and the equitable distribution of this value
throughout the supply chain.
© Copyright
2004 Agricultural Research &
Advisory Bureau ARAB.
Some Information on the Retail Sector
Top
10 Global Retailers in 2000
Rank
|
2000
|
1
|
Wal-Mart Stores, Inc.
|
2
|
Carrefour Group
|
3
|
The Kroger Co.
|
4
|
The Home Depot, Inc
|
5
|
Royal Ahold
|
6
|
Metro AG
|
7
|
K-Mart Corporation
|
8
|
Sears, Roebuck and Co.
|
9
|
Albertson, Inc.
|
10
|
Target Corporation
|
Top Global Retail Companies - 2000
Company
|
Top Exec.
|
Stores owned
|
Sales
($ bill.)
|
Countries of Operation
|
Wal-Mart Stores (US)
|
H. Lee Scott
|
4,190
|
195.3
|
US,
|
Carrefour
(
|
Daniel Bernard
|
8,926
|
55.3
|
|
Kroger Co. (US)
|
Jos.Pichler
|
2,354
|
49.0
|
US
|
Ahold (
|
C. van der Hoeven
|
8,062
|
44.8
|
US, The
|
Metro (
|
Jan con Haeften
|
2,169
|
40.1
|
|
Albertsons (US)
|
P. Lynch
|
2,533
|
36.8
|
US
|
Tesco (
|
T. Leahy
|
907
|
32.4
|
|
Safeway (US)
|
S. Burd
|
1,688
|
32.0
|
US,
|
Rewe Zentrale (
|
Jans
Reischl
|
11,788
|
31.9
|
|
Aldi (
|
Theo Albrecht
|
4,388
|
26.5
|
|
