IOI Corp sees downstream recovery amid stiff competition, economic headwinds
Integrated palm oil player IOI Corp Bhd (KL:IOICORP) is optimistic that the group's downstream operations — classified as resource-based manufacturing (RBM) in its books — has seen the worst of the downcycle amid stiff competition from Indonesian players as well as concerns over global economic uncertainties and tariff risks.
Deputy Group CEO Tan Kean Hua says easing feedstock prices, margin recovery and improving demand — coupled with lOI's continued emphasis on operational efficiency — will help keep the RBM segment competitive. The sub-segments within RBM are refining, oleochemicals and specialty food ingredients.
“The outlook should be better. I'm hopeful the worst is over. The last nine to 12 months were really tough — even some competitors reported losses," Tan tells The Edge interview.
"I always remind the team that while we can't control external factors, we can control productivity and efficiency. When we operate efficiently, our cost base remains low — and that gives us a long-term edge."
He adds that feedstock prices such as crude palm oil (CPO) and palm kernel oil (PKO) have eased, reducing cost pressure. "Demand is also improving, especially from European customers who are restocking ahead of the EU Deforestation Regulation (EUDR) deadline. That's lifting prices and supporting profitability for oleochemicals."
IOI's RBM segment posted a 36.2% year-on-year (y-o-y) drop in profit to RM119.3 million for the nine months ended March 31, 2025 (9MFY2025). Excluding RM34.1 million in fair-value losses on derivatives, core profit was RM153.4 million — down 28% from RM211.6 million a year earlier, owing mainly to weaker refinery margins, partially offset by better oleochemical contributions.
For the financial year ended June 30, 2024 (FY2024), the segment's profit plunged 52.3% y-o-y to RM3293 million, from RM691 million.
In FY2024, profit contribution from RBM was 21.4%, against 78.6% from the upstream or plantation segment, compared with 37.5% and 62.5% respectively the year before.
Resilient margins despite overcapacity, Indonesia's tax edge
According to Tan, IOI's refining and oleochemical operations remain under pressure, owing to industry overcapacity and Indonesia's tax structure for its palm oil sector.
"Indonesia's tax regime gives its refiners a cost advantage. They avoid export duties when sourcing CPO locally and pay minimal duty when exporting refined products. Indonesia's combined duty and levy gives Indonesian players a clear feedstock cost edge (over Malaysian producers)," he explains.
Despite the challenges, Tan says, IOI's refining margins remain positive, supported by its ability to produce low-contaminant oils and continued cost-optimisation efforts.
On the issue of 3-monochloropropanediol esters (3-MCPDE) — food processing contaminants that can be found in refined edible fats and oils, as well as in foods made with them — Tan says the group is well positioned to meet quality standards in both Malaysia and the European Union.
“We can produce CPO and related products that meet the Malaysian standard for 3-MCPDE. Among the major producers, this isn't really an issue. The problem lies with the smaller players, which is why the government's plan to mandate 3-MCPDE limits from July 1 has been delayed," he says.
Turning to the oleochemical segment, Tan says competition is present but less intense than in refining. Customers in this segment tend to be more selective, placing a premium on product quality, timely delivery and certification — areas in which Malaysian producers such as IOI have an advantage over some Indonesian rivals.
IOI operates four oleochemical plants — two each in Peninsular Malaysia and Germany — with a combined capacity of 890,000 tonnes per year. The Malaysian plants are fully palm oil-based, whereas the German plants also use coconut, rapeseed and sunflower oils.
Actively exploring further downstream acquisitions
Looking ahead, IOI plans to deepen its focus on higher-margin segments in oleochemicals — particularly pharmaceutical ingredients, personal care and cosmetic ingredients, as well as food and nutrition ingredients, says Tan.
He cites the group's strategic acquisition of German-based Cremer Oleo GmbH & Co KG in 2016 — now known as IOI Oleo GmbH — as a success story. The move provided IOI with valuable German expertise in both product applications and marketing, areas in which the group had sought to strengthens key benefit of the acquisition, Tan adds, was the transfer of knowledge to IOI's Malaysian operations.
"IOI Oleo GmbH has built a CARE studio in Germany where we work closely with customers to co-develop formulations. We're replicating this model by building our own CARE studio in Penang this year to better tailor our offerings to the Asian market," he says, adding that the customer base spans multinationals as well as niche, private-label brands.
Tan highlights that R&D spending is more significant in the oleochemical segment than in the upstream plantation business, although no specific figures were disclosed. He notes that IOI has also invested heavily in IOI Oleo GmbH, which filed 26 patents in the last nine years.
"For example, we have a German start-up, KetoLipix Therapeutics GmbH — a spin-off of IOI Oleo GmbH — focused on ketone ester technology. It's still in the drug development stage, but we're spending a few million ringgit a year on it," he says.
In addition, IOI recently approved a RM125 million capital expenditure to establish a Lipid Excellence Centre in Germany that will focus on R&D, application studies, analytics and quality control.
Tan explains that aside from the expertise and know-how, being in Europe brings IOI closer to the approving authorities in the pharmaceutical field in Europe and North America.
As for expansion plans, Tan says IOI is actively exploring acquisitions to broaden its product offerings in the downstream segment.
As at end-March 2025, IOI had net debt of RM1.66 billion. Based on shareholders' funds of RM11.94 billion, IOI's net gearing stood at 0.14 times, giving it ample headroom to take on acquisitions.
"We've long been interested in further acquisitions, but it's not easy. First, you need to find the right company. Second, you must be able to pay the right price. And third, if it's a good company, chances are others are eyeing it, too — which turns it into a bidding war. Multinational companies are usually in the mix as well," he says.
"Ultimately, our goal is to go further downstream and expand our product range. When customers come to us, we want to be able to say — not only do we have this, but we also have a complementary line of products, made possible through acquisitions. That's been our aspiration."
IOI's speciality fats business is undertaken through its 20%-associate Bunge Loders Croklaan (formerly IOI Loden Croklaan), which operates manufacturing facilities in Malaysia, the Netherlands, the US, Canada, Ghana and China.
In March 2018, IOI sold its 70% controlling stake in IOI Loders Croklaan to New York-listed Bunge Ltd for US$
"The contribution from Bunge to our downstream division remains significant," says Tan, adding that IOI has retained board representation in Bunge Loders Croklaan.
Given intense competition affecting the RBM segment, some quarters question the need for planters to expand downstream. Citing IOI's performance in FY2023 when the segment posted record profits, Tan says it is a question of timing, as the downstream business is highly cyclical.
"For integrated players like us, this is a natural hedge. When the feedstock prices are low, you make more money in manufacturing, downstream. When feedstock prices are high, you make more from plantations, upstream, and less in manufacturing," he explains, adding that the cycle is becoming harder to forecast because of Black Swan events such as the Covid-19 pandemic, which affected supply chains.
"We believe integrated is always better, that you're hedging along the line [value chain] and you get value addition going further downstream."
Minimal SST impact
On concerns that the 5% sales and service tax (SST) imposed on PKO and crude palm kernel oil (CPKO) could affect downstream players, Tan says the impact on IOI is limited, as registered manufacturers can apply for exemption under Item 1, Schedule C of the Sales Tax (Persons Exempted from Payment of Tax) Order 2018.
"When we buy CPKO or PKO directly from the miller or crusher, we can apply for exemption as a manufacturer under Schedule C1. Since we produce and export the product, the 5% SST does not appIy. But trading companies in between do pay the 5% SST and pass on the cost, which eventually pushes up market prices," he says.
According to Tan, industry groups such as the Malaysian Palm Oil Association (MPOA) and the Malaysian Oleochemical Manufacturers Group (MOMG) are still in ongoing talks with the government on the implementation of the SST.
"Ideally, we'd like the government to give a clear 'no' to the SST, so the whole market isn't affected, especially the trading companies that buy from crushers and resell to oleochemical players," he says.
As part of its strategy to diversify and enhance returns from its existing land bank, IOI has ventured into coconut cultivation. This falls under what the group classifies as its sidestream segment.
As at FY3024, the group had planted 3,131ha of coconut, with plans to expand the area to 5,000ha over the next few years.
Tan notes a shift in demand from PKO towards crude coconut oil (CNO), particularly as buyers seek EUDR-compliant alternatives. While both PKO and CNO are rich sources of lauric acid, the latter is not subject to the EUDR, making it a preferred choice of certain buyers.
To capitalise on this trend, IOI also plans to build downstream coconut processing facilities. "We aim to create a full coconut value chain — from estate to mill to processing. This includes extracting coconut oil and producing coconut-based byproducts. The oil can be used as oleochemical feedstock or sold directly," Tan says.
Also under its sidestream segment, the group's non-CPO subsidiary IOI Palm Wood Sdn Bhd has begun operations in Segamat, Johor, converting oil palm by-products such as palm trunks into value-added products.
In addition, IOI is developing a zero-waste paper pulp plant in Pekan, Pahang, through a 45:55 joint venture with Nextgreen Global Bhd (KL:NGGB). The plant will produce paper using empty fruit bunches and is expected to begin operations by mid-2027.
"The plant's first-phase production capacity is around 150,000 tonnes per year. It's still [too] early to assess the earnings contribution," Tan says.