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

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

Kenneth R.
Szulczyk
, Ph.D.

Convention Center, UUM

December 4, 2012

Contents


Introduction


Palm oil
t
rees


Plantation land
u
se


Palm
o
il uses and products


Oil palm
p
lantation
w
aste
p
roducts


Substituting biodiesel for
d
iesel fuel


Palm oil
b
iodiesel
p
roduction and use


Tallow and
y
ellow grease as
c
heap
o
il sources


Conclusion


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

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

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

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

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

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

Palm Oil Trees

World’s Oil

Production in 2010

Production

(
tonnes/year
)

Area Harvested

(
hectares/year
)

Yield

(
tonnes/hectare/year
)

Coconut

(copra)

oil

3,987,563

11,376,698

0.3505

Maize

oil

2,321,544

161,765,388

0.0144

Palm

kernel

oil

5,688,559

15,410,262

0.3691

Palm

oil

43,573,470

15,410,262

2.8276

Rapeseed

oil

22,774,074

31,640,756

0.7198

Safflower

oil

131,959

772,705

0.1708

Soybean

oil

39,840,137

102,556,310

0.3885

Sunflower

oil

12,698,807

23,113,785

0.5494

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.



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

Plantation Land Use

The total area planted in Malaysia in hectares

Plantation Land Use

The international price in U.S. $s per tonne

Plantation Land Use


Greenhouse gases


trap the sun’s energy as
heat, causing the earth to become warmer


Global Warming Potential (GWP)

1.
Carbon dioxide is defined as 1 GWP

2.
Methane has 16 GWP


One tonne of methane traps 16 times the heat of one
-
tonne
of carbon dioxide

3.
Nitrous
oxide has 298 GWP


One tonne of nitrous oxide traps 298 times the heat of one
-
tonne of carbon dioxide

4.
W
ater vapor has no GWP; sensitive to temperature


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

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

Palm Oil Uses and Products


Malaysia refines the palm oil into a variety of
products

1.
Palm oil

2.
Palm olein


a liquid oil at room temperature


Used to fry foods


Oil is thermally stable, no bad odors, and little
oxidation

3.
Palm stearin


more solid at room temperature

4.
Palm oil acid distillates


leftover from refining


Used in animal feeds, Vitamin E, and oleochemicals

Palm Oil Uses and Products

Oil

Product

Products

Palm

oil




Cooking

oils

Margarine,

reduced

fat

spread,

shortening,

and

vanaspati


Fried

foods

Doughnuts,

French

fries,

potato

chips,

and

nuts


Non
-
fried

foods

Baked

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


Other

Soap

noodles

Palm

stearin

Shortening,

margarines,

vanaspati,

and

pastry

and

bakery

products

Palm

olein

Margarine

and

cooking

oil

Palm

fatty

a
cid

d
istillate

Animal

feed,

soap,

oleochemicals,

and

Vitamin

E

Palm Oil Uses and Products


Producers use a press to extract palm kernel
oil from the kernel


Products

1.
Palm kernel oil

2.
Palm kernel olein

3.
Palm kernel stearin

4.
Palm kernel cake


remains of kernel


Used in animal feeds


Industry presses the cake into expeller pellets

Palm Oil Uses and Products

Oil

Product

Products

Palm

kernel

oil

Cocoa

butter

substitute,

confectionery

products,

detergents,

ice

cream,

margarine,

oleochemicals,

and

soap

noodles

Palm

kernel

stearin

Cocoa

butter

substitute,

confectionery

products,

nondairy

coffee

creamers,

filled

milk,

and

non
-
hydrogenated

trans
-
fat

free

margarine

Palm

kernel

olein

Ice

cream

and

soap

noodles

Palm

kernel

cake

Cattle,

catfish,

poultry,

and

swine

feeds

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

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


Palm Oil Uses and Products

The international price in U.S. $s per tonne

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


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


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

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
lignocellulosic

fermentation to convert sugars into ethanol


Butanol and ethanol could be mixed with gasoline



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



Substituting Biodiesel for Diesel Fuel

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

Substituting Biodiesel for Diesel Fuel

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





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


P
alm oil biodiesel sold for $1.49 per liter in January 2011


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
F
uel
S
tandards 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?

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

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

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