Branching out beyond palm oil

FOR 45 years, palm oil has been the engine of IOI Corp Bhd’s growth. Now, Datuk Lee Yeow Chor wants to ensure the group’s future does not depend on a single commodity.

The group is putting its land, plantation waste and downstream expertise to work in new ventures spanning solar energy, biomass, coconut and higher-value ingredients, the chief executive officer tells StarBiz 7 in a rare media interview.

These investments could eventually become core businesses alongside its established palm oil operations. The plan is not to walk away from the business that built IOI, but to use its strength to fund the next phase of growth.

With palm oil prices subject to the vagaries of weather, supply and global demand, Lee – who is also IOI’s group managing director – is laying the groundwork for more diversified earnings, including income streams that could offer greater stability than the commodity cycle.

“I’m not content with just that,” says Lee, referring to the group’s established integrated palm oil business.

The strategy is set out in IOI’s five-year plan for 2025 to 2029, which includes expanding its product portfolio and pursuing climate and sustainability initiatives.

The longer-term ambition is to build new businesses that can complement, rather than replace, the plantation and downstream operations.

“We are ready to explore business, any business, be it in Malaysia or outside Malaysia,” he says.

Betting on a stronger palm oil cycle

For now, palm oil remains the foundation of IOI’s earnings, and Lee is optimistic about the market’s prospects in 2027.

Crude palm oil (CPO) prices had eased from around RM5,000 per tonne in September to approximately RM4,600 at the time of the interview.

However, Lee expects prices to return to around RM5,000 if supply tightens as anticipated.

“If there is a squeeze in supply, it is quite reasonable to expect the price to go back to what it was in September, around the RM5,000 per tonne level,” he says.

The delayed effects of El Nino are an important part of that outlook. Dry weather does not immediately translate into lower output, as it takes about six to nine months for the impact to become apparent in fruit formation and ripening. The effects can actually stretch over a period of about 18 months.

Lee points to the 2015 El Nino episode, when production fell by about 13%, as an indication of how significantly weather conditions can affect output.

The market had yet to see a substantial production slowdown at the time of the interview.

Palm oil stocks were forecast to rise to about 3.3 million tonnes at the end of September, their highest level since 2022, while monthly production was expected to be almost 20% higher than in August.

Nevertheless, Lee expects supply to tighten as the weather effects feed through. He also sees support from competing vegetable oils.

Disruptions to sunflower oil shipments from Ukraine could constrain global availability, while soybean oil prices have remained relatively firm compared with palm oil.

The resulting discount against competing oils could make palm oil more attractive to major importing countries, including India.

Lee expects the first quarter of 2027 to be supported by the seasonal decline in production, although the outlook remains dependent on actual supply and demand conditions.

Higher selling prices could also more than offset rising production costs. IOI expects higher fertiliser and diesel costs to add less than RM200 per tonne to production costs, compared with a potential RM400 to RM800 per tonne increase in CPO prices from levels earlier in the year.

“So we expect an increase in our profit in 2027,” Lee says, referring to the group’s financial year ending June 30.

The outlook is also supported by IOI’s replanting programme. After several years of aggressive replanting, the group expects the exercise to strengthen future productivity, with newer-generation planting materials expected to deliver better oil yields and income in the years ahead.

That stronger underlying business gives IOI a platform to invest in its next phase of growth.

Making land work harder

One of the clearest examples of this approach is IOI’s entry into utility-scale renewable energy (RE) through a 500MWac solar photovoltaic project integrated with a 250MW/1,000MWh battery energy storage system.

This project marks IOI’s first large-scale RE project under the Corporate Renewable Energy Supply Scheme.

Under the agreement, IOI is tying up with a government-linked renewable energy company, which will hold a majority stake in a renewable energy development company (RED), says Lee.

The RED is also entering into a long-term land lease agreement with IOI involving 1,300 acres of land in Bahau, Negri Sembilan.

The project will be supported by the government-linked company’s long-term RE offtake agreement with a leading global digital infrastructure platform with its headquarters in Singapore.

The Singapore-based company is expected to procure up to 500MWac of RE over a 21-year period to support its data centre operations in Malaysia.

“It’s a good first step for us to go into this RE business as this fits into our initiatives and five-year strategy. This also gives us a stable recurring income,” he says.

Lee declined to reveal the total project cost but analysts estimate a ballpark figure of around RM2bil, based on typical costs for a solar installation incorporating battery storage.

For IOI, the attraction is not simply the prospect of entering a growing RE market. It is also the opportunity to turn land into a recurring source of income without selling the underlying asset.

“We are not selling, we are just leasing the land,” Lee says.

The structure allows IOI to earn rental income once the land is handed over, followed by returns from the solar project when it becomes operational. The income horizon discussed for the project is 21 years.

Lee expects the combined income from the lease and solar venture to be better than plantation income, while offering greater stability. He describes the expected return from the solar investment itself as reasonable, given the long-term nature of the arrangement.

He points out that an oil palm estate takes years to reach commercial production after planting, with little or no income during its early years.

The solar project, by contrast, is intended to generate rental income from the start of the lease, followed by power-generation returns after construction.

IOI is exploring similar opportunities, although suitable locations depend on access to the electricity grid.

The group is not planning to convert large swathes of its plantations, and the Bahau project uses only a small portion of its land.

A possible green industrial park on adjacent land is another longer-term opportunity, but Lee says this is not an immediate development plan and could be more than 10 years away.

Turning plantation waste into value

Another part of the plan is to extract more value from oil palm biomass, transforming by-products from the group’s existing operations into commercially useful materials.

IOI has already established a factory to convert oil palm trunks into panel blocks for building materials and furniture. The trunks become available when old palms are felled during replanting, creating a recurring supply of raw material.

The group is also developing a paper pulp business in Pahang using empty fruit bunch fibres.

Its first phase is designed for an annual capacity of 150,000 tonnes, with completion expected by the end of 2028.

If successful, a second phase could add another 300,000 to 450,000 tonnes a year.

The project is being undertaken with partners that bring technology and market access.

IOI’s stake is about 33%, while its partner is a major Chinese state-owned pulp manufacturer and distributor that Lee described as a Fortune 500 company distributing about 13 million tonnes of pulp annually.

The intended end markets are not limited to conventional writing paper. Demand is expected to come from tissue, packaging and food containers, including paper-based materials that can replace some applications currently served by plastic or timber.

For Lee, the opportunity lies in the fact that the raw material is continuously generated by IOI’s main business.

“These are by-products,” he says, explaining that the biomass is renewable and can be used to replace materials derived from finite resources.

Coconut and higher-value ingredients

Coconut is another crop IOI is cultivating to broaden its plantation portfolio.

By 2027, the group expects to have planted about 12,000 to 12,500 acres of coconut, making it one of Malaysia’s largest coconut growers by planted area.

The business will follow IOI’s integrated model: beyond cultivation, the group plans to build a coconut mill to process the crop into products such as coconut water and coconut oil.

A joint-venture partner affiliated with Chinese food and beverage group Ting Hsin will provide an outlet for the coconut water, which is intended for export to China.

IOI will also be able to use the coconut oil in its existing oleochemical and food ingredient operations in Malaysia and Germany.

Lee expects the profit contribution per acre from coconut to be higher than that of oil palm, although the market is much smaller and cannot absorb production on the same scale as palm oil.

The group’s coconut acreage will account for only about 3% of its total plantation area of approximately 550,000 acres, including in Indonesia.

“So it’s a good diversification,” Lee says, pointing to the potential to add value to the group’s downstream businesses.

The group’s downstream business is also moving further up the value chain, where specialised products can offer more differentiation than commodity-based products.

IOI is expanding its basic fatty acids business into fatty esters used in pharmaceutical and personal care applications.

Its German plant has 24 patents registered for pharmaceutical applications involving esters, while its personal care business has developed formulations for products such as shampoo, face lotion, lipstick and hand cream.

Its associate company Bunge Loders Croklaan is also expanding capacity through an integrated plant complex in Amsterdam, combining bulk oil refining with specialty fats processing.

The investment was estimated at around RM3bil.

Commissioning began in the third quarter, with further stages expected through the first quarter of 2027.

Although IOI has only a minority interest in the associate, Lee sees partnerships as a way to expand the group’s reach and capabilities efficiently.

“Everything we do ourselves, we may not be able to do so many and in such an effective manner,” he says.

Capital discipline and succession

The new ventures will require substantial capital and time to generate meaningful earnings.

Lee acknowledges that even large investments may initially contribute only a modest share of IOI’s total profit, given the scale of the group’s existing plantation earnings.

Capital expenditure has risen from around RM500mil five years ago to between RM900mil and RM1bil, reflecting the group’s aggressive replanting programme and other investments.

IOI has a dividend policy of distributing at least 50% of net profit to shareholders. In the past, when palm oil prices were lower and capital expenditure was less demanding, its payout sometimes reached 70% of profit.

Lee says net gearing is around 12%, leaving room for the group to fund new projects. While gearing may rise as investments are undertaken, he expects it to remain well below 20% under the current plans.

The group’s longer-term direction also raises the question of succession at a family-controlled business built by Lee’s late father, Tan Sri Lee Shin Cheng.

Lee says the next generation of the family is welcome to join IOI, and one of his children has already done so. However, there is no fixed timeline for a hand-over.

Family members must demonstrate an interest in the business, understand its history and values, and show they are ready to take on greater responsibilities.

They will be assessed in the same way as other management personnel.

“We have a strong practice of succession planning, I would say throughout the organisation. So at the moment, I have a deputy group CEO, who can be my successor if something happens to me today.

“My next generation will be on a longer time horizon. But at the moment, what’s important is that the group has got a good system of succession planning throughout various levels of the management and divisions, management levels and divisions,” Lee says.

Moving forward, IOI is not trying to become something entirely different. Its plantation operations will continue to anchor earnings, while the downstream business provides an established route into higher-value manufacturing.

Solar energy, biomass and coconut offer the possibility of turning land and by-products into additional sources of income, while investments in specialty fats and oleochemicals deepen the group’s participation in global markets.

The challenge will be to scale these businesses without compromising returns or shareholder distributions.

For Lee, the rationale is clear: a strong core business should give IOI the means to build what comes next and make the group more resilient when the next commodity downturn arrives.