China’s Palm Oil Market – Opportunities for Malaysian Palm Oil

Palm oil is among the major edible oils and fats consumed in China. In 2020, palm oil market share registered 17.0% in China’s total oils and fats consumption. It ranked second behind soybean oil which accounted for 42.0% of China’s oils and fats consumption. In China’s palm oil market, there are 2 main factors affecting palm oil trade in the country. Firstly, growth in the palm oil trade is affected by rising soybean meal demand to feed its growing husbandry sector. Higher soymeal demand encourages more soybean crushing. The resultant increase in locally produced soybean oil reduces the spread between soybean oil and palm oil, making palm oil less competitive.   From the correlation response between soybean oil output and palm oil demand, it can be concluded when soybean oil output growth is higher than oils and fats demand growth, palm oil demand will drop (Chart 1).

Chart 1: Impact of Soybean oil output on Palm Oil Demand

The other factor influencing China’s palm oil trade is the close competition between its 2 major suppliers, Malaysia and Indonesia. Indonesia’s price undercutting strategy towards palm oil trade has affected Malaysia’s palm oil market share in the country.   From a high of 41.5% in 2015, Malaysia’s palm oil share in Indonesia fell every year to reach 30.2% in 2019. The drop in market share is due to cheaper price offers and rising palm oil production.   In 2020, the Malaysian PO market share rose to its highest since losing its share in 2015. The notable gain in market share is due to a drop in the country’s export to China. In 2020, Malaysia’s palm oil share rebounded to reach a high of 41.8%.   Shortage in Indonesian PO supplies was the main factor contributing to the higher MPO share. During the year, Indonesia’s palm oil exports to the country drop by 1.5 million MT or 28.2% to 3.8 million MT.  In 2020, more palm oil is being used locally to meet the country’s B30 biodiesel mandate which was implemented on 1 January 2020. A drop in the country’s palm oil production is another factor that resulted in a reduction in the availability of Indonesia’s palm oil for exports. For 2020. Indonesian palm oil production dropped 2.1 million MT to 42.2 million MT as the country’s palm oil output was affected by the lag effect in production caused by the drought from July to September 2019. During the period, the average monthly rainfall was 57.33 mm which 35.4% lower compared to the same period in 2018 of 88.7 mm.

Chart 2: China’s palm oil imports by country

Amidst keen competition from rising China’s local soybean oil production and Indonesia’s competition, there are areas in China which the Malaysian palm oil industry can exploit to strengthen its position or capturing the growing opportunities in China’s edible oil market.

Area 1: Inner Region Market Opportunities

Palm products purchase in less developed markets in the interior regions, such as Xinjiang, Qinghai, Gansu, and Shaanxi, is confined to packed palm fats like shortening for frying. Aside from that, famous tourist destinations like Kunming, Chengdu, and Xi’an which have higher growth in the HORECA and confectionery sector would provide opportunities for higher palm oil products sales.

Chart 3: Distribution of Average Household Disposable Income by Region

Source: China Statistical Yearbook, 2020

Currently, the high cost of transporting palm oil products from coastal ports to the inland region is impeding the expansion of palm oil used in the region. The bulk of China’s interior is served by traditional railway transportation networks. As a result, the construction of processing and storage facilities will be needed to ease the problem of increasing palm oil exports to the less developed inner China area. Malaysian companies can take initiative to consider positioning an effective logistics, distribution system, and manufacturing facilities together with potential Chinese partners in these regions to enhance the availability of palm throughout China. This marketing effort can be further strengthened by organizing a regular seminar to create awareness among SME food processors and distributors on the superiority & versatilities of palm oil applications. Besides that, a positive image of the health and nutrition attributes of palm oil could be created among the audience to increase the motivation for the Chinese users in that area to purchase and use Malaysian palm oil.

Area 2: Pushing More Malaysia’s Palm Oil into China’s Consumer Market

Changes in consumer behavior in China have paved the way for increased use of palm oil products in recent years. Increasing consumer perception of healthy foods is a major trend affecting Chinese consumer behavior, which affects their buying decisions. Consumers are becoming more cautious with the oils and fats they eat, and more are moving away from animal fats due to health concerns. As a result of this development, the market share from animal fats is now being substituted by vegetable oil. Based on Oil World figures, animal fats consumption only accounts for 12.7% of total oils & fats taken in 2019, after falling at an average rate of 1.7% per year since 2010. This development can be capitalized by palm oil players to increase palm oil sales in the country as palm oil is a healthier option without compromising too much of the functional properties offered by lard.

Effective campaigns to promote the general health and beneficial attributes of palm-based products can be conducted effectively and regularly to penetrate consumers’ household market. Successful and consistent strategies to encourage the overall health and benefits of palm-based products can be run to reach the household market. Using renowned local public nutritionists can be one of the ways to effectively communicate to Chinese consumers.  Since WeChat is a common messaging platform, it may be helpful to use it to communicate the messages.

Chart 4: Share of Animal Fats Consumed Against Total Oils & Fats in China

Source: Oil World

It is now time to introduce and promote to the health-conscious segment of the Chinese consumers the Malaysian red palm oil. The Chinese authority has now allowed red palm oil of 20 MT and less (per consignment in the packed form) to be imported since mid of last year, while bulk form (in flexibag, iso tank, etc at any volume) from 1 March 2021 onwards. 

Apart from promoting red palm oil as an alternative healthy cooking oil among the various locally produced exotic seeds oils, avenues of blending red palm oil with other soft oils and also as an ingredient in bakery product formulation can be exploited. Red palm oil is rich in carotenoids (pro-vitamin A) and vitamin E. Blending it into soft oils and using red palm fats in bakery product formulation will increase the product’s nutrient content. The blending of red palm oil’s red-orange color will also make the appearance of products such as margarine, mayonnaise, and ice-cream more appealing without requiring colorant.

Besides the food sector, growing demand for hygiene products due to the COVID-19 pandemic opens rooms for more palm-based oleochemicals derivatives import, to be used in the hygiene and sanitization products manufacturing sector. The expectation that a higher amount of cleansing products such as detergents, hand wash will be produced as China recovers from the pandemic is inevitable.  Furthermore, the growing demand for green products will compound the demand growth of oleochemicals on top of the growth driven by improvement in the standard of livings. 

Area 3: Capitalizing on the Urbanization of Rural Area 

Inner China townships have grown rapidly in recent years as a result of China’s continuous reform program. In rural areas, the expansion of the inner China region has resulted in the emergence of a new growth market for palm oil products. According to the China National Bureau of Statistics, the rural population in 2019 was 551.6 million. As a result, for every 1 kg rise in oil and fat usage per capita, there will an increase in oils and fats usage by 551,620 MT.

In China, urban dwellers eat more oils and fats than those who live in rural areas. Annual per capita intake in urban areas is around 23-27kg, while it is around 15-18kg in rural areas (chinaoils. cn). Hence, there is a potential of additional 2.76-6.61 million MT oils & fats to be added into China’s market should per capita consumption among the rural dweller reaches those staying in the urban area.   While these could be achieved due to the development in rural areas, migration of its citizens from rural to urban areas is also likely to generate higher growth for edible oil demand in the urban area.  The migration from urban to rural cities will improve the lifestyle and buying power per capita of the rural Chinese. This will encourage the usage of more refined oils and hence will create more opportunities for palm oil import as it increases opportunities for palm oil to be promoted for blending with other soft oils.  The advantage of using palm-based blended cooking oil is that palm oil is competitively priced and it is a good frying medium.

Chart 5: Palm Oil Applications by Sector in China

Source: Industry consultation and MPOC estimates

In China, about 75% of total palm oil is consumed in the food sector, including catering, instant noodles, food processing, bakery & confectionery sectors, etc. Palm products other than palm oil, also have a good share in non-food sectors, such as oleochemicals sectors, etc.

It can be deduced from the breakdown of the palm oil application chart in China that rural urbanization favors the growth of palm olein consumption. This is since RBD palm olein caters to the two major industries that use this palm fraction, namely catering and food processing (Chart 5).

Although frying instant noodles also involves using RBD Palm olein or RBD palm oil, the potential of growing palm oil demand from this sector is rather limited as most manufacturers are currently using palm, and the growth of instant noodles demand in China is rather limited.   This is due to the earlier mentioned reason where there is an increased preference for healthier products among Chinese consumers and also an increase in disposable income. Malaysia could benefit from higher China’s usage of oleochemicals through the exports of oleochemicals and also RBD stearin to support China’s oleochemicals production. 

Another area that shows promising growth for palm oil demand would be the bakery & confectionery sectors (solid fats). Despite being the second-largest bakery and confectionery market in the world, the per capita is only at 7.2kg, a far cry from 22.5kg in Japan & 40.2kg in the USA as reported by USDA.  Euromonitor has forecasted that the baked goods in China will grow 53% between 2021 and 2025, or an average of 10% per annum.  This shows tremendous potential for a higher uptake of palm oil or palm products in these sectors.

To avoid price war against solid fats shipped from Indonesia, Malaysian producers have to differentiate their products and if possible work with the end-users to formulate bakery products that are unique to their customers. In other words, Malaysian manufacturers should not just be merely a supplier but rather a strategic partner to the bakery producers.

Conclusion

Malaysia is among the top palm oil exporter to China. But the exports face intense competition from Indonesian palm oil exporters, and also the rising local soybean oil output. The rise in soybean oil production is induced by the need to produce more soymeal to feed its growing husbandry sector. Nonetheless, as shared in this paper, there are avenues that the Malaysia palm oil industry players can work on to mitigate the competition from Indonesian exporters and local soybean oil production.  Among all, China’s economic development is the key to strengthen Malaysia’s position. Along with the economic development, Malaysian exporters can tag along with the change in consumer demand for more healthy oil and rising income of the Chinese brought by rapid economic development and the urbanization of the rural area.

Focusing on product differentiation and through the strategic partnership will further help the Malaysian exporters not only in developing individual customers but ensuring the long-term demand of palm products, preventing Indonesian suppliers from the competition through price competition. Finally, leveraging on a social media platform like WeChat is also another outlet for Malaysians to exploit to strengthen its market position.  This social media platform will assist to promote goodness and help to attract Chinese consumers towards palm products. 

Prepared By: Lim Teck Chaii  and Desmond Ng

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