Hedging naturally
VERY few companies in the country are like Kuala Lumpur Kepong Bhd (KLK). They have been around for 110 years, growing from a palm oil and rubber plantation business back in the day to one of the largest oleo-chemical producers in the world.
To get to know them better and upon the invite of KLK’s chief executive officer, Tan Sri Lee Oi Hian, I paid them a visit. Ten minutes in, it became clear to me that what sustains the century-old pulse of this company was the deep importance its leadership placed on innovation.
A soft spoken and true gentleman at heart, Tan Sri Lee shared an impressive evolution of KLK, from humble plantation company to its ambitious ventures downstream and going global. It is interesting to note that even a company with such heritage and established business practices, innovation is integral to their business strategy and processes.
When the Palm Oil and Rubber lab happened in 2010, we challenged the industry to expand more aggressively downstream. The industry at the time was predominantly upstream, where exports were three times greater than that of the downstream sector.
The problem with this was when commodity prices dropped, the industry was hard hit. Expansion into the downstream is seen as a form of natural hedging. KLK, together with the other large companies responded positively to the challenge.
Therefore, EPP6 and EPP8 were set up to incentivise companies to go downstream, specifically into oleo derivatives. KLK was one of the first to jump on this boat.
Very quickly, they devised their biggest move in innovation. They began to be very focused in prioritising efforts that will capture the lucrative downstream oleo-derivatives segment.
They began heavily downstream research (R&D).
Over the past years, KLK engaged in projects to increase the capacity and introduce new downstream specialty products. New technologies were acquired. The best people were brought in. This was not just a domestic strategy. KLK looked to Europe.
In recent years, KLK made two strategic investments in Germany. The first acquisition was in 2010 when KLK bought a plant on the river Rhine in Germany, now known as KLK Emmerich GmbH.
The plant, which is also over 100 years old with world-scale assets, has production facilities which manufacture a range of fatty acids, investing in their and development hydrogenated fatty acids and splitting of vegetable oils.
In 2015, KLK bought a plant in the city of Dusseldorf, which is the centre of a very key chemical region in Germany, also along the River Rhine.
This plant produces both vegetable-based as well as tallow-based oleochemicals, giving KLK a much more complete oleochemical portfolio in the European region.
By making this move, KLK is strategically situated close to key customers and raw material supply routes in the heart of Europe. They have become a major oleochemical manufacturer and supplier to new European markets.
Going back to the big picture of the industry, we anticipated that crude palm oil prices would decrease at some point, and we were not far off the mark, as prices have fallen by 53% since 2011.
Production of downstream products also proved to be more lucrative per unit revenue, at 50% more compared to up/mid-stream products.
If companies did not diversify and go downstream, they would not have benefited from these larger margins. glycerine by