OPPORTUNITY COST: A worker takes a sample of crude palm oil at a biodiesel plant in Ipoh, about 200 kilometres
north of Kuala Lumpur. As a result of the high prices of CPO, the usage of biodiesel faces obstacles as opportunity
cost of biodiesel refining becomes substantial. — Reuters photo

27/08/2012 (Borneo Post) - Biofuel came under the spotlight approximately seven years ago, as the government launched its National Biofuels Policy 2005 as a means to promote the usage of biofuels, leveraging on Malaysia’s ideal climate required to produce oil palms.

The government launched the policy with the aim of positioning Malaysia as a major global biodiesel producer, however, the attention has waned substantially following the realisation that fossil fuels are cheaper.

Palm oil is noted to have distinct advantages over other oils as it is a productive oil crop and is cheaper as compared with other vegetable oils used in biodiesel without subsidies.

STRONG COMPETITION: While competition from other countries runs high in the biodiesel segment, Malaysia’s loss
of market share does not signify a loss of competitiveness as it is home to the ideal climate and land required to grow
the natural feedstock.

Its economic cycle of 25 years also makes oil palm less susceptible to changes in weather patterns, ensuring a more reliable source of supply for the biodiesel industry.

“As far as I know, biodiesel was the in-thing about four years ago, but it has been proven that it cannot compete with fossil diesel fuels which are much cheaper on a per-litre basis,” said Mahbob Abdullah, an industry veteran.

He added that the efforts being made in the country to popularise biofuels would have to be aided by a subsidy from the government. However, he believed that it would erode its financial position.

“As such, there’s a delay in the widespread use of biodiesel and biofuels.”

A report by the International Institute for Sustainable Development (IISD) also noted that, “Malaysia subsidises the end-user prices of petroleum transport fuels, so, by replacing a proportion of petroleum diesel with biodiesel, it hopes to reduce its subsidy burden.”

Mahbob Abdullah

It added further that the very striving of governments worldwide to encourage the production and use of biofuels undermined the economic viability of the industry. Fluctuating oil prices and growing concerns about climate change had led to a renewed commitment to renewable energy aimed at expanding the production and use of biofuels from crops.

According to an analyst from a local research institute, Malaysia had lost global market share in the biodiesel segment as countries such as Indonesia, Thailand and Columbia became stronger in the segment. However, he believed that it did not mean that Malaysia has lost its competitiveness as the country was still home to the ideal climate and land needed to grow the natural feedstock required for palm-based biodiesels.

On the subject of implementing biodiesel usage in the transportation and aviation industries, the analyst believed that there was still a significant technological gap in the domestic market which prevented the viability of the plan.

“The technological gap prevents biodiesel from being commercially viable. Also, technology diffusion to the mass market is limited. They just do not have the physical capacity or knowhow required to use the specific technology just yet,” he added.

Another obstacle for the usage of biodiesel for commercial purpose was noted to be the substantial opportunity cost of biodiesel refining. This was believed to be due to the constant high prices of crude palm oil (CPO).

On the subject of CPO prices, Mahbob explained that the idle processing plants for biodiesel were a reminder that palm oil prices could be supported by petroleum prices.

“A decline in palm oil prices will give the option for the oil to be converted to biodiesel. So the option has become a factor in keeping prices up for palm oil. It is also likely that as petroleum prices go up, the prices of vegetable oils, including palm oil will also respond in kind,” he added.

Mahbob believed that when the prices of fossil fuel increased as a result of high demand and growing scarcity, the biodiesel plants might come in relevant again. However, the veteran expected criticism on the industry following such a move and would have to fend itself by explaining the reasons for the palm oil to be turned into fuel and not into food instead.

He revealed that, in the meantime, some biodiesel plants were trying to use low-grade by-products such as palm stearin for its processes. Palm stearin is the solid fraction of palm oil produced by partial crystallisation at controlled temperatures.

However, Mahbob pointed out that prices had responded to demand for palm stearin, making it less profitable to do the conversion.

“Owners try to find markets where fuel costs are high and again with limited success.”

When asked on the areas of improvement that local industry players could focus on, a local analyst believed that while commodity prices remained high, local industry players should seek to increase their required inputs, be they labour or capital, to limit the wastage of biofuel-related feedstock.

On the government’s side, the analyst highlighted that the government could review the current export tax structure which would allow local players more incentives which would in turn help them expand their presence in the global markets vis-à-vis the competitive tax structure in Indonesia