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In Part 1, I moved from the plantation mud of my more familiar world into oleochemicals and uncovered a striking paradox. After decades in which palm oil helped free natural oleochemicals from raw material constraints, the industry appears to be relearning the discipline of scarcity. The kernel is the heart of the matter, but once its oil has been converted into molecules, a different contest begins: who secures the molecule, what do they do with it, and who captures the most value?
Indonesia has long used differential export taxes and levies to encourage domestic processing of palm products rather than allowing their export in less processed forms. The strategy can be summed up simply: policy instructs the molecule to stay home a little longer. Dr Julian McGill's analysis translates that shift into hard numbers. Around 70% of Indonesian palm kernel oil (PKO) is now consumed domestically, encouraged by differential export taxes that favour processing at home. There is a certain historical irony, as Indonesia's downstream strategy followed a path Malaysia had pioneered earlier, but on the scale of a far larger feedstock base. Over time, such incentives shape not only prices but also the geography of where refineries, fractionation plants, oleochemical facilities, suppliers and skills cluster.
Indonesia is therefore no longer asking only whether palm products should be processed at home. The question now is how far downstream the molecule should travel before it leaves. Indonesia historically exported relatively little PKO in fractionated form, but McGill's analysis shows fractions rising to around 40% of Indonesian PKO related exports, approaching Malaysian levels. Less raw PKO is freely available, while more specialty fractions find their own markets. Palm kernel stearin, for instance, has applications in specialty fats and cocoa butter substitutes. That can be described as part of the contest of chemistry versus confectionery. The same humble kernel can eventually help wash our hair, or find its way towards something resembling chocolate. It illustrates why total PKO production tells only part of the story. The other question is what people choose to turn it into. Allocation matters as much as production.
Conventional economics suggests that scarcity encourages substitution. Chemistry, however, is not always that accommodating. Linear alkylbenzene sulphonic acid (LABSA) and natural fatty alcohol derived surfactants are not straightforward substitutes; their performance and applications differ. Yet supply disruption can change purchasing behaviour. When geopolitical shocks constrain petrochemical surfactant inputs, manufacturers may turn to natural fatty alcohol even when it is more expensive and not the ideal technical substitute. That is a useful lesson: substitution is not always about finding something cheaper, sometimes it is about finding something that still arrives at the factory gate. Suddenly, the detergent bottle contains a little geopolitics too.
Then there is China. Is China a client or a competitor? The answer appears to be both. China has become a significant destination for South East Asian fatty alcohol, yet it can take that imported building block further downstream into surfactants used in detergents, shampoos and cleaning products, some of which are subsequently exported. For the non chemist, the business model is what matters: South East Asia supplies an important chemical building block, and China adds another layer of chemistry and another layer of value. There is nothing wrong with that, since it is exactly what successful downstream industrialisation is supposed to achieve. But China's example does not mean Malaysia lacks similar capability. Malaysia already manufactures surfactants and specialty oleochemical derivatives. The challenge is to deepen, broaden and commercialise more of what we already know how to do.
The question is therefore no longer 'can Malaysia do it?' but 'how much more value should we capture here before the molecule leaves our shores?' Malaysia's oleochemical achievement should not be understated. The country possesses substantial global manufacturing capacity and decades of industrial experience. Yet another factory is not automatically another competitive advantage. Equipment can be purchased, reactors installed and processes licensed. Harder to reproduce are proprietary formulations, application expertise, patents, process know how, specialty products, technical service and relationships with customers who buy solutions rather than simply tonnes.
A feedstock disadvantage hurts enormously when two producers sell almost identical commodities on thin margins. It matters far less when one transforms the molecule into something specialised enough for customers to pay for performance, reliability and knowledge. Indonesia may sometimes possess an advantage before the molecule enters the factory; Malaysia must create more advantage before it leaves.
High PKO prices sound like universally bad news for South East Asian manufacturers, but McGill argues they may actually strengthen the region's relative position, because producers elsewhere must secure the same scarce feedstock from much farther away. Expensive feedstock hurts everybody, but expensive feedstock nearby may still be preferable to expensive feedstock half a world away. Proximity, however, should never become an excuse for complacency. History is full of countries sitting beside valuable raw materials while somebody elsewhere became richer by knowing what to do with them.
Malaysia has travelled this road before. The country did not remain merely a grower. It built mills, refineries, ports, laboratories and oleochemical plants around the crop. The next step may be subtler. It may sit inside a patent, an application laboratory, a customer formulation, a lower carbon process, or a molecule designed for a particular performance. The next factory may partly exist inside somebody's head, which is why human capital and intellectual property increasingly matter as much as physical capacity.
This brings us to McGill's most provocative observation. He was less diplomatic when discussing aspects of European policy, describing it as 'bodoh dan sombong', meaning foolish and arrogant. Strong language, but it conceals a more serious economic argument. His presentation pointed out that declining European Union (EU) demand for palm oil can also undermine the availability of PKO associated with that supply chain. Europe is extending the scope of the EU Deforestation Regulation to cover further palm derived oleochemical products. According to McGill's analysis, additional palm derived intermediates are due to enter the regulatory scope from 30 December 2027, one year after the current legislation is expected to take effect, while surfactants and detergents classified under HS 3402 remain outside that product scope.
HS, or Harmonised System, codes classify traded goods globally. The outcome is a curious asymmetry: the same palm derived molecule can face different rules depending on how far the chemistry has progressed before reaching Europe. Take a covered palm derived intermediate made in South East Asia and ship it to Europe for further conversion, and it carries the relevant due diligence obligations. Carry out another layer of chemistry in Malaysia, Indonesia or China first and export the resulting HS 3402 surfactant, and the finished product currently sits outside that same product scope. The same underlying palm supply chain, but a different point of conversion, with different regulatory treatment. This can be reduced to one memorable line: the molecule does not disappear; the chemistry moves. That is the basis of his warning that Europe risks shooting itself in the foot. Regulation intended to address deforestation may unintentionally make some European downstream processing less attractive while encouraging more value addition elsewhere. The environmental objective can remain legitimate even when the industrial consequence is unintended. It recalls the Cobra Effect, when a well intentioned policy changes incentives in such a way that the eventual outcome runs partly against what the policy was meant to achieve.
Malaysia can complain about Europe, or it can ask whether Europe has just provided another reason to do more of the chemistry here. I prefer the second question. None of this means Malaysia should resist traceability or environmental accountability. Quite the opposite. A chemical customer increasingly wants more than purity, composition and performance. Where did the feedstock originate? Can its provenance be demonstrated? What emissions travelled with it? Was it responsibly produced? The modern molecule increasingly needs a biography, and perhaps even a passport. Malaysia has spent years developing certification and traceability upstream. The opportunity is to carry credible information further downstream and turn sustainability into part of the commercial proposition. Imagine two drums of fatty alcohol meeting the same technical specification, one arriving with credible traceability, carbon information and dependable sustainability documentation and the other arriving with far less evidence. Will sophisticated customers continue to regard them as commercially identical? Perhaps not. That is where sustainability begins moving from something we must prove towards something worth selling.
Indonesia possesses a far larger feedstock base and has deliberately structured its policy to encourage domestic downstream processing. Malaysia must understand the competitive effects. Reducing industrial strategy to a permanent tax race carries its own dangers: Indonesia adjusts a levy, Malaysia responds; Indonesia changes again, Malaysia follows. Before long, industrial strategy becomes fiscal ping pong. Malaysia's more durable response is to strengthen what is harder to reproduce through another tax adjustment: research capability, intellectual property, application centres, engineering knowledge, skilled talent, automation, energy efficiency, customer intimacy and specialty chemistry. Help industry climb the value chain, rather than endlessly compensate it for standing on the lowest rung.
Our ambition need not be to possess the cheapest carbon entering every factory gate. It should be to make that carbon worth considerably more by the time it leaves. This is also where the Asean Oleochemical Manufacturers Group (AOMG) has an important role. Established in Manila in 1986, the association now links oleochemical producers across Malaysia, Indonesia and the Philippines. Its CEOs' Executive Dialogue on 14 August 2026 drew more than 100 participants from industry, finance, research and government around a timely trilemma: growth, green transition and geopolitics. With Lee Jia Zhang of Kuala Lumpur Kepong Bhd (KLK) chairing AOMG for 2026 to 2028, the association can do more than exchange views. It can help the region think collectively about competitiveness, sustainability and where the next layer of value should be created.
This brings me back to those oleochemical plants in Pasir Gudang that once fascinated the corporate planter and researcher in me. Malaysia has already achieved something important: the country took a tropical agricultural commodity and built a sophisticated chemical industry around it. Yet industrial success has a habit of moving the finishing line. China shows how an Asean intermediate can acquire another layer of chemistry and value. Europe's regulations may influence where still more processing takes place. Malaysia does not need to discover the road from molecules to knowledge; the country is already on it. The challenge is to travel further and faster.
That means improving upstream productivity, recognising the kernel's growing strategic value, securing traceable feedstock, lowering carbon intensity and developing more proprietary chemistry and stronger customer capabilities. Malaysia's factories do not need to close for the country to lose ground. Plants can remain, ships can keep sailing, and production statistics can still look respectable while intellectual property, formulations, customer relationships and higher margins accumulate elsewhere. Then, without fanfare, the end game may not arrive with a dramatic announcement. It may simply dawn one morning after years of comfortable incrementalism.
A factory is only as powerful as the molecule it can secure. Malaysia's future depends on something deeper: how much knowledge and value the country puts into that molecule before letting it go. After the AOMG engagement, I hope I have at least found the right path into another new planet of the palm oil supply chain. I began more comfortable with mud than with molecules, and emerged with a better appreciation of kernels, fatty alcohols, surfactants, geopolitics, and an entirely new alphabet of acronyms. Writing about it has opened another learning lane for me. From mud to molecules, and from molecules to knowledge, I am still learning. For now, however, I have had enough of LAB and LABSA. I am going for my laksa, the one bit of chemistry I know exactly what to do with.
Joseph Tek Choon Yee has over 30 years of experience in the plantation industry, with a strong background in oil palm research and development, C suite leadership and industry advocacy. The views expressed are the writer's own.
Source: The Star