The inferno was sparked by a large explosion at the Derrimut factory on Wednesday morning sending chemical drums flying into the air at the height of the blaze.
No one was injured and it was declared under control about four hours later, with 180 firefighters tackling the flames.
Significant progress was made overnight with more than three million litres of water and 40,000 litres of foam used to suppress the fire, Fire Rescue Victoria Deputy Commissioner Joshua Fischer said.
But it is expected to burn for days.
Fire crews have continued to extinguish the factory fire at Derrimut. (James Ross/AAP PHOTOS)
"It is a dynamic situation and we are undertaking atmospheric monitoring so we can allow businesses in the area to return to premises on a case by case basis," Mr Fischer said.
"It is going to take some time to ascertain the exact cause and we also need to gain access to the scene which is an active fire area with lots of contaminants and structural integrity issues of the remaining building."
The Environmental Protection Authority warned people and pets should avoid water in Cherry Creek, Anderson's Swamp and Kayes Drain until further notice after pollutants from firewater entered the downstream waterways.
"There will certainly be testing waterways and understanding what's going on," the EPA's Steve Lansdell told ABC Radio Melbourne.
The authority has not seen any ash impacts from the fire but urged people to wash surfaces and any fruit and vegetables before eating them.
Road closure remain in place with locals warned to continue monitoring conditions outside.
One worker died and two were injured in a fire at the same building which houses chemical blending company ACB Group and fuel producer Powerplus in October 2023.
That fire was also sparked by an explosion.
The EPA issued the site with two notices and inspected it nine times since that first explosion and found them compliant.
Road closure remain in place with the fire expected to burn for days. (James Ross/AAP PHOTOS)
EPA and Worksafe investigations into the 2023 fire continue.
The factory houses multiple businesses including chemical blenders and fuel distribution, with drums containing kerosene, fuel, methylated spirits, methanol and other substances stored at the site.
University of Melbourne chemical engineering academic Gabriel Da Silva said all smoke was toxic and chemicals from the factory were likely destroyed in the blaze.
"The risk from the chemicals here has been largely providing that fire to happen, as opposed to people being exposed to compounds that are being released," the associate professor told AAP.
Western Metropolitan MPs Moira Deeming and David Ettershank questioned the management, safety and storage of toxic chemicals in Melbourne's west.
The Anti-Toxic Waste Alliance was formed after a similar factory fire in nearby West Footscray in 2018 and several other blazes at recycling plants in the same region.
Experts have warned of ash and smoke impacts from the fire. (HANDOUT/VICTORIA ENVIRONMENT PROTECTION AGENCY)
Spokesperson and former Greens MP Colleen Hartland said repeated emergencies had lessened the community's faith in regulators.
"What is it about these kind of places that you know, even after the death of a worker, they go on to a year later to have another massive fire?" she said.
On Thursday, Premier Jacinta Allan suggested agencies had enough powers to investigate the lead up to and fallout from the "deeply dangerous" fire.
"We have in recent years strengthened the powers particularly of the EPA - their investigative powers, their regulatory powers - and this will be thoroughly investigated by those agencies," she said.
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