Malaysian UCO Arbitrage: Navigating Regulatory Risks and the Push for Traceability in SAF Markets

The global race to decarbonize aviation has thrust Malaysian used cooking oil (UCO) into the spotlight as a critical feedstock for sustainable aviation fuel (SAF). With the EU's SAF mandates set to rise to 70% by 2050, Malaysian UCO exports to Europe—particularly Spain—have surged, reaching over 126,000 tonnes in 2024. However, this boom is clouded by escalating fraud, as virgin palm oil is increasingly mislabeled as recycled UCO, threatening Malaysia's reputation and compliance with EU sustainability standards. For investors, the stakes are high: firms with opaque supply chains face regulatory and reputational risks, while those with transparent traceability systems stand to profit as the SAF market matures.

The Fraud Epidemic: When Waste Becomes Fraud
Malaysia's UCO exports now exceed domestic collection estimates by a factor of three, according to Transport & Environment (T&E). In 2023, Malaysia reported 458,000 tonnes of UCO under the International Sustainability and Carbon Certification (ISCC) system—a volume equivalent to an implausible 15.2 liters per capita. By comparison, China and Indonesia reported just 1.4 and 0.9 liters per capita, respectively. These discrepancies point to systemic fraud, as subsidized Malaysian cooking oil (RM2.50/kg) is cheaper than UCO (up to RM4.50/kg), incentivizing substitution.

The fallout is already tangible. In 2024, the ISCC withdrew 11 Malaysian certificates due to traceability failures, while EU auditors found Malaysian UCO imports riddled with inconsistencies. For example, Repsol, Spain's largest SAF producer, sourced 53,000 tonnes of Malaysian UCO in 2024—but its reliance on self-declared supplier data leaves it vulnerable to fraud.

EU Regulatory Hammer: Risks and Opportunities
The European Union is tightening its grip on UCO imports. The EU Deforestation Regulation (EUDR), effective late 2024, bans products linked to deforestation, but excludes palm oil-derived biofuels from its scope—a loophole critics call “a gift to fraudsters.” Meanwhile, the EU's proposed suspension of ISCC certification for waste-based biofuels (pending until 2027) adds further uncertainty.

Anti-dumping duties on biodiesel imports from China (up to 36.4%) and stricter due diligence requirements under the EUDR are forcing buyers to scrutinize suppliers. Airlines like Lufthansa and Delta are now demanding verifiable ESG credentials for SAF feedstocks, sidelining opaque producers.

Repsol's stock has risen 15% since 2022 as it expands SAF production, but its reliance on Malaysian UCO exposes it to regulatory and reputational risks if fraud persists.

Investment Strategy: Traceability and Certifications Are the New Alpha
Investors should prioritize firms with transparent traceability systems and certifications like the Malaysian Sustainable Palm Oil (MSPO). The MSPO ensures palm oil is produced without deforestation or labor violations, and its adoption is critical for EU compliance.

• Winners:
• Sime Darby Berhad (5295.KL): Malaysia's largest palm oil company, 98% MSPO-certified, with a blockchain-based traceability system for UCO.
• Neste (NESTE.HE): Singapore's SAF leader, which relies on third-party audited UCO imports and has publicly committed to zero-fraud sourcing.

• Companies with ISCC+ certification: These meet stricter EU standards than the standard ISCC, reducing fraud risks.

• Losers:

• Firms relying on Malaysian UCO without third-party verification, such as Evergreen Oil & Feed, face heightened scrutiny and potential supply disruptions.
• Palm oil traders without MSPO certification risk losing EU access as regulators close loopholes.

MSPO-certified palm oil exports have grown 20% since 2020, but non-certified exports still dominate—a gap investors must avoid.

The Bottom Line: Time to Act
The window for arbitrage in opaque UCO supply chains is closing. As the EU's deforestation rules tighten and airlines demand transparency, only firms with verifiable traceability will thrive. Investors should shun Malaysian UCO exporters without MSPO or ISCC+ certification and favor companies that prioritize ESG compliance. The stakes are clear: in the SAF race, sustainability is no longer a “nice-to-have”—it's a make-or-break requirement.

Final call to action: Ditch the fraudsters. Back the transparent.