“Issues and Challenges to Developing a New Essential Oil

Industry in Malaysia”

Mohd. Murray HunterUniversity Malaysia Perlis

Presentation to the 2nd International Biotechnology and Biodiversity Conference

The Biotechnology Pyramid

Genomics

Fermentation

Micro-propagation

Mutagenesis

Thermodynamic Processes

Green Biotechnology Reframed

Disciplines

White Biotechnology

Red Biotechnology

Micro-organisms

Malaysia’s Biotech Policy

About 15 Years

Business cant wait that long

We Have a steep

learning Curve

Competencies Required During the Essential Oil Development Process

Screening & Bio-prospecting

Propagation & domestication or

introduction

Planting, cultivation & maintenance

Harvesting, Extraction and

wastage handling

New product development &

creation of value added products &

activities

Strategic, operations, finance and technical

management

Product & venture management

Marketing & commercialisation

Sustaining and growing the enterprise

(adapting & survival)

Output: Result/Performance, Sustainable and healthy enterprise or

a struggling and failing enterprise

Opportunity and technical competencies require:

Botany, ethno-botany, research ability, chemistry, bio-chemistry, analytical

chemistry. Market and specific technical product knowledge

Technical Competencies require: Plant physiology, micro-propagation, nursery

management, agronomics

Technical competencies require:

Bio-system engineering, Soil management,

entomology, plant nutrition, Agronomics, field

management, irrigation engineering

Technical competencies require:

Thermodynamics and plant physiology, heat transfer, distillation engineering,

chemistry, chemical engineering, agricultural

engineering, environmental engineering (waste

management)

Strategic, opportunity and technical

competencies require: Project management,

marketing management, chemistry, cosmetic

chemistry, perfumery/ flavour knowledge,

Packaging & design, manufacturing

engineering

Strategic, organizational, relationship opportunity competencies require:

Business strategic, industry knowledge, industry

networks, ability to raise finance, ability to plan,

implement & adjust, leadership, entrepreneurial

Strategic and organizational

competencies require: Administrative, financial management, technical management, strategic

management, personnel management, resources

management, entreprenuerial

The Issues

What are essential oils?

Essential Oil

A volatile oil obtained from a wide variety of plant, scrub, and tree species and from various parts of the plant anatomy, such as the roots, rhizomes, wood bark, leaves, stems, fruit, flowers and seeds. Usually extracted by hydro or steam distillation, expression or effleurage - Hunter 1996

Concretes and Absolutes

Volatiles and waxes extracted from plant material with hydrocarbon solvents (usually benzene and hexane) through washing and removal of the volatile solvent with distillation. A waxy aromatic substance remaining is called a concrete. The concrete is washed with alcohol to remove the volatile materials and ethanol removed through vacuum distillation to leave an absolute.

Plant Material

Expressed

Oil

Cold expression of citrus fruits

Terpeneless Oil Terpene Tails

Essential

Oil

Water, water & steam and steam

Distillation

Absolute

Concrete

Solvent Extraction

Washing with ethanol and vacuum distilling

ethanol away

Pomade

Enfleurage

Vacuum distill away the ethanol

Oleoresin

CO2

Extract

CO2 Extraction

The Natural Aromatic Product Family

Cosmetics, USD 90 M, 6%

Agrochemicals, USD 150 M, 10%

Intermediates, USD 120 M, 8%

Pharmaceuticals, USD 220 M 15%

AromatherapyUSD 250 M 17%

Flavour & Fragrance, USD

650 M, 44%

The Size of the Essential Oil Market

Ratio of Natural to Synthetic Materials Used in the Flavour & Fragrance Industry

Essential Oils & Natural Aromatic Materials13%

Synthetic Raw Materials

87%

The market size for Natural Raw Material for the Flavor and Fragrance Market is USD650 M

Essential Oil Production

USD 650 million

Fragrance & Flavour Production

USD 20 Billion

80

7254

5030

326

252

196

192

650

800

Various Food Products Processed MeatBeverages Dairy ProductsAnimal Feed Processed Food & VegetablesFlour & Starch Products Oils and FatsFish Products CosmeticsHousehold Products

World Wide Market Size Estimate 2003

World Geographical Distribution of Flavour & Fragrance Compound Sales

28%

14%11%10%

37% USA

Europe

Japan

Asia

Other

Some Generic Global Issues

CO2 Emissions

Resource Depletion

Global Warming

Changed Weather Patterns

Decline of Arable

Land

Temp. Increase

Sea Levels Rise

Decline of eco-system, biodiversity

and sustainability

Pests & Diseases

Droughts Floods

Food Crisis

Declining Productivity

Alternative Land Use

Rising Costs

Urbanisation

Unstable Production

Lack of finance for production

Population Growth

Production

Growing unemployment

Consumption Loss of Confidence

And consumption

Bank Liquidity Global Warming, The Food and Economic Crisis

Market Turbulence

Pri

ce

Pri

ce

Quantity Quantity

Demand Demand

Current Supply

Current Supply

Forecast Supply (FS)

Actual Future Supply (AFS)

Forecast Supply (FS)

Actual Future Supply (AFS)

P1

P3

P2

Aggregate Decrease in Production

P1

P2

P3

b) Upward Trend in Pricing Leading to Greater Supply

a) Downward Trend in Pricing Leading to Decreased Supply

A forecast is accepted that supply will decrease in the coming year and traders buy up stocks leading to higher prices (P2). Producers see good returns and increase production leading to a glut of

supply, thus decreasing prices (P3). This fluctuation is on a time lag depending

upon the time frame from extra planting to harvests.

Aggregate Increase in Production

A forecast is accepted that supply will increase in the coming year and traders

don’t buy up stocks leading to lower prices (P2). Producers see poor returns and

switch to alternative crops, leading to a shortage of supply, thus increasing prices

(P3). This fluctuation is on a time lag depending upon the time frame from extra

planting to harvests.

Wild Collection and Threatened Plant Species

Bargaining Power of Producers

Bargaining Power of Producers

Essential Oil Production

Trading

Flavour & Fragrance

Compounding End Product Manufacture Wholesaler Retailer

Consumer

1.0 1.6 2-3.0 (6-9) 2-2.5 (18-24)

Relative and (Absolute) Value Added Through Chain

1.1-1.2 (19.8-28.8)

1.2-1.4 (23.76-40.32)

The Essential Oil Value Chain (Flavour & Fragrance Industry)

The Regulatory Environment

Derelict vanilla plantation, Seychelles.

EU/IFRA policy will repeat similar scenes.

Old clove distillation works, Zanzibar before eugenol was classified as R36-43.

Subsequently became derelict!

Top Twenty Essential Oils Produced in the WorldEssential Oil Botanical Name Volume

(Tonnes) Under Threat Cosmetics

Under Threat Biocides

Under threat Fragrance

Orange Citrus sinensis 26000 X X

Cornmint Mentha Arvensis 4300

Eucalyptus Euc. globulus 3728 X X X

Citronella Cym winterianus 2830 X X X

Peppermint Mentha piperita 2367

Lemon Citrus limon 2158 X X

Euc. Citriodora Eucalyptus citriodora 2092 X X X

Clove Leaf Syzygium aromaticum 1915 X X X

Cedarwood (US) Juniperus virginiana 1640

Litsea cubeba Litsea cubeba 1005 X X

Sassafras (Brazil) Ocotea pretiosa 1000 X X

Lime Citrus aurantifolia 973 X X

Spearmint Mentha spicata 851

Cedarwood (China)

Chamaecyparis funebris 800

Lavandin Lavandula intermedia 768 X X

Sassafras (China) Cinnamomum micranthum 750 X X

Camphor Cinnamomum camphora 725

Coriander Coriandrum sativum 710

Grapefruit Citrus paradisi 694 X X

Patchouli Pogostemom cablin 563 X X

The Rural Crisis

Average age of farmers in Malaysia

Opportunities?

Education?Infrastructure?

Market Orientation?

Technology?

Templating of Natural Aromatic Molecules

Templating of Natural Aromatic Molecules

Plants Animals Food Objects

Analysis Modeling

Synthesis

Product

Biotechnology

Organic

Odour plus Stability Threshold Efficient Value

synthesis Added Benefits

Applications

Perfumery Cosmetics

Stable in formulations Cost effective Efficacy (i.e., antimicrobial)

Botany/ethnobotany Bio-prospecting

Head-space Chromatography

Separation Extraction

Screening

Antimicrobial Anti-fungal Anti-tumor Anti-aging

Flavour & Fragrance

Botany Biochemistry Computational Chemistry

Research

Idea from Research Institute, University faculty or individual within them

Undertake study with objectives interesting to researchers

Primarily single discipline approach

Objectives based on discipline thinking

Project results and conclusion

Publish

Paper at Conference

Add to CV

Little commercial interest:· Private sector unaware

·No or limited economic study or little consideration to scale up potentialNB: to bioprocess engineer has this as a fundamental consideration (difference between scientist and engineer)

Typical Research Model

Desirable Research Model

Planning Phase

R&D Phase

Commercial Phase Start-up Growth Maturity

Information seeking and

Planning orientation

Seeking of information,

looking for ideas, screening for opportunities,

setting of a vision and planning out

the project

Test hypothesis, review market, confirm viability,

develop applications, increase knowledge, learn how to operate commercial operation.

Collaborate with customer & R&D

Institutions

Research and collaborative orientation

Begin with an entrepreneurial

management style, then move to marketing orientated style and eventually corporate management style

Start-up Develop

company, production and early customer base, usually

very personal & hands on.

Growth Develop value-added products, new market, customers, expand production, move to more formal

management

Maturity Corporate orientation

with well defined depts. Formalised

marketing & production roles in organization, take strategic outlook

for business.

RM 3,600,000

RM 200,000

LOWER CAPITAL INVESTMENT

HIGHER ROI

Sustainability

Production Processes

Farm size & layout

Organisation & methods

Propagation

Cultivation

Processing

Marketing

Climate

Weather Rainfall Wind

Sunshine UV radiation Temperature

Humidity

Conducive weather Or

Floods, droughts, etc

Physical Environment

Soil Topography Atmosphere

Natural flora & fauna habitat Urbanisation

Suitability of conditions Pollution (air, land & water)

Labour sources Water resources

(create hinterland where farm part of)

Human Habitisation

Knowledge Suppliers & contractors

Pollution Attitudes and concerns

Resource inputs, fertilizers, herbicides, insecticides, machinery, research capabilities

Positive Inputs Water

Sunshine Nitrogen

Agricultural inputs Fertilizers etc Knowledge

Labour

Negative Inputs

Adverse physical conditions

Pests & diseases Pollution

Heavy metals

Business Environment

Markets Finance

Trade environment

Customers Financing &

various kinds of capital

Competition Low prices

Changing demand patterns

Government Infrastructure Regulation Taxes & subsidies

Trade environment

Research

Negative Outputs

Runoffs, wastes, carbon

Some recycling back to system

Positive Outputs

Products

Revenue flow back to system

An Agricultural Enterprise as a System

Wind drift

Farm/Plantation

Soil Floor

Sub-Soil

Fertilisers, herbicides, insecticides

Leaf & organic decompositions

Sub-terrainium water

Sun

Climate & Weather

Cultivation

Propagation

Processing

EconomicProducts

Runoffs Surface water

Wastes Chemical residuals

Some wastes

recycled

Watershed runoffs onto farm/plantation

Atmosphere

Nitrogen, gasses, etc

Lakes Rivers Canals Oceans

Daylight hours UV radiation Temperature Humidity Rainfall

Conducive weather, or floods, droughts, etc

Regional Eco-System A Farm/Plantation as a System

Other Farms

Insects and pests

Genetic Biodiversity

Soil Surface

Rainfall (Moisture Source)

Organic Materials Phosphorous (P)

Sulfur (S)

Nitrogen (N)

Nitrogen fixing bacteria In root system

Water (H2O)

Mineral Based Materials (Amphibole & Feldspar)

Calcium (Ca)

Potassium (K)

Magnesium (Mg)

Iron (Fe)

Carbon (C) Oxygen (O2) Hydrogen (H) Through

air in pores

Specific Issues & Challenges To Malaysia

Biodiversity

Low Crop Diversity in Malaysia

Limited number of students interested in natural product chemistry & agro-

entrepreneurship

Very few world class professors

Small Holder Producers

Forest, Jungle wild plant Gatherers

Producers of Animal Extracts

Chemical Feed Stock

Manufacturer

Local Collectors Research

Institutes & Universities

Plantation Producers

Government

Aroma Chemical Manufacturer

Producers of Essential Oils as By-

Products

Trader & Exporter Producer

Associations

Broker

Specialty/Aroma Chemical

Manufacturer

National FDAs

FEMA

IFRA

RIFM

IOFI

REACH

SCCP

Trader, Importer & Exporter

IFEAT

Flavour and Fragrance House

Agent

Standards Associations Flavour and Fragrance

House (subsidiary) Agent

Cosmetic & Personal Care Manufacturer

Household Product

Manufacturer

Food & Beverage

Manufacturer

Other Food & Non Foods

Manufacturer

Wholesale Networks

Retail Networks

Consumers

The complexity of the essential oil industry

Aromatic Products from Citrus Fruits

Harvested Oranges Extractor Cold Press

Process

Press Liquor & di-limonene

Vacuum Distillation

Technical Grade di-limonene

Peel Heat Evaporator

Molasses

Ferment to Alcohol

Cattle Feed

Orange Juice Centrifuge

Cold Pressed Orange

Oil

Distillation

Terpeneless Folded Oil Food Grade

di-limonene

The Tasmanian Essential Oil Industry Structure

Growers Industry

Associations Research Advisory

Committee

Government Development Corporations

(RIRDC/HAL)

Research Provider (University of

Tasmania/TIAR)

Field Processing

Processing and Marketing Company

(Essential Oils of Tasmania Pty. Ltd.)

Agents The World Market

Value

Ava

ilabi

lity

Incr

ease

s

Usefulness Increases

Media Reports

Ideas

Data

Information

Knowledge

Wisdom

The Continuum from media reports to wisdom in relation to availability and usefulness

Market Requirements of an Essential Oil

Required Oil Yield, Quality for production/market Viability

Propagation and Planting Costs

Crop Management

Harvesting & Extraction Costs

Volume and Market Acceptance

Laboratory Research

Field Research

Weather

Land Suitability

Knowledge and Skills

De-stabilising Event –

competitor, regulation, new

substitute

Market Contacts &

Network

Actual Yields and Oil Quality

Other unforseen external factors – politics, disaster,

war, regulation, etc

Assumptions & Patience

Validity based on information & Judgement

Risk Environment in Essential Oil Development

Evaluation & selection of

suitable planting materials

Knowledge of specific crop management techniques

Knowledge of harvesting, handling

& extraction techniques

Economies of scale & correct business model, Market strategy

Plant physiology & propagation

protocols

All factors effect on yield & quality

$ Cost

$ Return

Deg

ree o

f P

rocessin

g

Final Product Form

Selection of Crop

Trials

Propagation

Land Preparation

Planting, Maintenance &

Irrigation

Harvesting & Extraction

Product Development

Final Product

Crop & Project Failure

No Return

Co

mp

os

t &

Mu

lch

Bio

fue

l

An

ima

l Fe

ed

Cru

de

Es

se

ntia

l Oil

Org

an

ic A

gro

-

pro

du

ct

Co

sm

etic

&

Aro

ma

the

rap

y

Nu

trice

utic

al

Ph

arm

ac

eu

tica

l

Conceptual Value Added Processing Options with Revenue and Cost

Implications

Consumers

Wholesalers & retailers

Manufacturers

Flavour & Fragrance Houses

Traders & Brokers

Primary Producer

Essential oil as primary Product. Focus on market demand & supply

and meeting standard

Essential oil as an ingredient in

a product. Focus on uses

and applications research

Manufacture of end products. Focus on

formulation and end product

development

Technical Focus

General or Niche Customers

Vertica

l Integ

ratio

n A

lon

g th

e Su

pp

ly

Ch

ain

Application Focus

Technology Focus

IP Focus (?) Specific

Customer

Branding Theme Consumer

Marketing Reaching

Mass or selected Markets

New Product Development

Agro Industrial Consumer Orientation Orientation Orientation

Consumer Trends

Important

Technical Trends

Important

Demand & Supply, Buying

Criteria Important

Venture Focus Along Different Parts of the Supply Chain

Competitive Rivalries Lemongrass quick yield and straightforward to cultivate and distil – expect high elasticity of supply from both existing and new producers. Producers of substitutes very aggressive

Bargaining Power of Suppliers Collecting the most suitable planting material require effort. Extraction and harvest .technology needs to be acquired or developed Analytical equipment or service maybe expensive/remote.

Substitutes Citral (main constituents) can be produced from a number of chemical feed stocks. Alternative oils (litsea cubeba) cost much less to produce. Lemon myrtle oil much smoother and acceptable to end users Many alternatives to lemongrass in product formulations.

Trends & Technology Alternative technologies to steam distillation (CO2) can make much smoother oil but will increase capital needs greatly. Natural, exotic, organic, FAIRTRADE could increase oils popularity (?) if seen as exotic.

Substitutes

Tre

nd

s &

Te

ch

no

log

y

Bargaining power of buyers

Bargaining power of suppliers

Competitive Rivalries

Re

gu

lati

on

Regulation SCCP placed lemongrass oil under scrutiny as a cosmetic ingredient in EU.

Industry Competitors

Intensity of Rivalry

Bargaining Power of Buyers Currently small item of trade in flavour industry, strong relationships with established producers.

High Market Growth Low Strong Weak Relative Competitive Position

Crude Essential Oil Steam Distilled

Essential Oil under

CO2 extraction

Cosmetic production for international

market

Organic Cosmetic

production for international

market

Essential Oil Based Agro-

chemical

Organisational Capability Creative, Opportunity, conceptual, strategic, Learning, Organisational, financial, Technical,

Marketing, Networking and Commitment Competencies

How the Business is Currently Performing

The base for potential future Development

Resources Existing and Available to the Business

The Set of Potential Opportunities

Tim

e a

nd C

om

pany E

vo

lution

/Chan

ge

Enterprise Performance

Personal Objectives

Strengths a

nd W

eaknesses

Them

e P

ersonal

Resourc

es N

etw

ork

Product M

anagem

ent F

inance

4

Ps

& S

kills

F

acilitie

s

Attr

ibute

s

External Influences &

Threats

M

arket

E

conom

y

R

egula

tion T

echnolo

gy

P

ositio

n Socia

l Si

tuation Change &

Com

petition A

spirations D

evelo

pm

ent

Key internal influences on the strategic

process

The process of product/market development

Key external influences on the strategic

process

Competitive Position

Cognitive Bias

Structural/ Support Strategies

Interventional Strategies

Depend on Location

Potential with Right Products and Correct

Distribution and Branding

Potential with Right Products and Correct

Distribution and Branding

Limited Unless a Specific Market Exists

Potential Large Market Dispersed Worldwide

Very Limited Unless Large Domestic Market

Local Market International Market

Essential Oil

Differentiated Product

Specialty/End Product

Much Larger Market with Competition

Diversification

Local or International Market Opportunities

CONCLUSION

Potential New Crop Ideas screened through a process that eliminates

potential ideas.

? The industrial product ideation process aims to generate ideas from

a zero base.

Leads to one crop (idea) to be developed

Leads to many ideas to be further screened

Essential Oil

Other Aromatic Extract

Aromatic Chemical (bio-route)

Aromatic Chemical (physical route)

Agro-Tourism Agricultural By-Products

The set of opportunities for an essential oil producer

Flavour & Fragrance

Commodity Oil

Specialty Oil

Aroma Chemical

Aromatherapy & Cosmetic

Production & marketing of

products Pharmaceutical

Agro-chemical

Business through select supply chains

Single Crop Portfolio of Crops

Higher differentiation and value adding

Builds brand image and support. Complements other activities.

General Trading (marketing)

Region’s production Specialised single oil

marketing General multi-oil

marketing

Diversification of activities

Mulches

Bio-fuel

Cattle feeds

Paper

Utilisation of wastes

Production of herbs and spices

Other diversification

Research Should be Focused Here

Natural Feed-Stocks

Physical Extraction

Essential Oils

Solvent Extraction

Aromatic Extracts

Selective Extractions

Aroma Chemicals

Enzyme Precursors

Microorganism synthesis

Specialty Chemicals

Mostly Imitation Here

The Areas of Growth are Here

Regulatory Approval is a Paramount Barrier

Discovery: 2-10 years The extraction or synthesis of a new clinical or biological substance

Preclinical Testing: 4 years Laboratory and animal testing

Clinical trials: 7 years Phase 1 20-80 health volunteers used to determine safety, pharmacological and dosage.

Clinical trials: Phase 2 100-300 patient volunteers used to determine safety and efficacy

Clinical Trials: Phase 3 1000-5000 volunteer patients used to determine clinical health benefit and incidence of adverse reactions

TGA Registration 1.5-2 years 35-40K pages of data submitted for evidence on average

Pharmaceutical Benefits Scheme: 8 months Determination of cost effectiveness

Product Promoted to the Medical Profession

Post Marketing Monitoring: monitor safety and efficacy when used in wider population, with other diseases and taking other medicines.

Opportunity

JV, partnerships,

strategic alliances, etc

Underlying Knowledge

Unexploited or idle

resources

Sustainability of the

venture for long-term survival

Cost and performance benefits of

product

Impact on and from

local community

Access to capital

R&D

Economies of scale or competitive advantage through differentiation

Access to market/ network

Market driven selection of crops and product Customer

driven management

Govt./ institutional support

Some Success factors

Nova Science Publishers

New York

Thank You