17/12/05 The Star)  -  A year ago, palm oil-based biofuel was pie in the sky to most Malaysians. Probably the only people who seriously believed in its potential were researchers, policy-makers, and a handful of school science project participants.

That is no longer the case. In recent months, much has been said about biofuel and how it will benefit the country.

Papers have been presented, research reports have been issued and announcements have been made. Sporadically, the stock market has reacted to news that certain plantation counters would become biofuel-driven.

The catalyst was Prime Minister Datuk Seri Abdullah Ahmad Badawi’s speech at the Commodities Industry Awards last August, in which he released preliminary details of the national biofuel policy.

Now being drafted, the policy has three key thrusts – to encourage the use of biofuel in the transport and industrial sectors; to export biofuel, particularly to Europe; and to enable the Malaysian Palm Oil Board (MPOB) to commercialise biofuel technology as a homegrown technology.

(Biofuel is commonly understood to mean fuel derived from biomass, which includes vegetable oils. Biodiesel is a form of biofuel that resembles the profile of petroleum diesel.)

Subsequently, several companies, including listed players, have disclosed their intentions to go into the biofuel business or to explore such a possibility. Among them were IOI Corp Bhd, the Felda group, IJM Plantations Bhd, TSH Resources Bhd and Kulim (M) Bhd.

A major event took place recently when MPOB and three companies – Kumpulan Fima Bhd, a subsidiary of Golden Hope Plantations Bhd, and Carotino Sdn Bhd – signed agreements on the construction of three palm biodiesel plants, two in Port Klang and the other in Pasir Gudang, Johor.

Such developments have injected a dose of bullishness into the plantation sector, thus helping to push up the Bursa Malaysia's Kuala Lumpur Plantation Index by almost 15% since the beginning of the year.

However, some observers feel that the optimism is based more on hype than on fundamentals.

Says an industry insider: “It's the same old story, isn't it? When everybody's rushing to get on board, maybe the smart thing to do is to get out of there.”

Nevertheless, more excitement on this front is expected this week. A news report quoted Plantation Industries and Commodities Minister Datuk Peter Chin Fah Kui as saying Abdullah would unveil several incentives for the biodiesel industry after chairing a Cabinet sub-committee meeting on Tuesday (Dec 20).

Incentives and subsidies are pivotal to the success of the policy. Without prodding and support from the government, there is little reason to switch to palm biodiesel. Nor will businesses venture into the production and marketing of the fuel.

Says a plantation analyst: “Government support is vital because the biodiesel production is an infant industry. Before going in as pioneers, the businesses need assurance that they will not be bearing all the risks. The infrastructure has to be in place, and that too requires a helping hand from the authorities.

“Of course, there has to be a subsidy mechanism because petroleum diesel prices are subsidised. Otherwise, biodiesel prices won't be attractive. And finally, somebody has to act as a central buyer for the biodiesel, and that's a role for the government.”

A tale of two oils 

Some veteran planters are not convinced that palm biodiesel will take off. They have gone through the cycles of the crude palm oil (CPO) market, and they believe that when the commodity's prices are strong again, the national fuel policy will lose impetus.

The argument here is that the policy is meant to promote greater consumption of palm oil, thus stabilising CPO prices at a high level.

As the thinking goes, the sense of urgency in this plan will peter out when the CPO market is on an up-cycle.

But this is only half the story. There are other, more enduring factors at play, namely the high petroleum prices and the growing concern for the environment.

Crude oil prices have been a cloud scowling over the global economy for many months now.

At a time like this, there is acute awareness that petroleum is a depleting resource and that we will eventually have to make do without it.

In addition, burdened by rising fuel costs, people are more willing to consider using cheaper substitutes, even if it entails making lifestyle and business adjustments.

In addition, the global green movement is gaining momentum. Governments, businesses and consumers are embracing environment-friendly products and practices, and these include biodiesel, which is renewable and cleaner than petroleum diesel.

The Kyoto Protocol, which aims to cut greenhouse gas emissions by at least 5% from 1990 levels, between 2008 and 2012, provides a push factor.

There are signs that the biodiesel market can be huge. In the European Union, biodiesel production almost doubled from 1.06 million tonnes in 2002 to 1.93 million tonnes last year (see table). According to the US National Biodiesel Board, biodiesel output in the United States has gone from 500,000 gallons in 1999 to 25 million gallons last year.

The question is, can palm oil become the material of choice for producing biodiesel? In Europe, biodiesel is mainly derived from rapeseed and sunflower seed, while the Americans rely on soy oil.

There is the argument that it does not matter that vegetable oils other than palm oil is used. The theory is that because these oils are close substitutes of each other, increased production of biodiesel will benefit the entire edible oil market.

However, an analyst argues that it is always beneficial for palm oil to develop a presence in the fuel market.

For one thing, it is a safeguard against a weakening of demand in its traditional markets. In addition, the new demand structure will reinforce CPO prices, particularly relative against other edible oils.

Not just numbers 

In an online discussion on a website for biodiesel enthusiasts, one participant posted this comment: “Palm, soy, I don't care, whatever is best price, I'll burn it.”

Clearly, pricing is a central issue. This is why some observers and plantation industry insiders say the push to promote palm biodiesel will be most effective when crude oil remains expensive.

It is also worth noting that the biodiesel markets in Europe and the US depend on subsidies.

There is always the worry that the authorities may have a change of mind. In Germany, for example, which is Europe's largest biodiesel consumer, there is uncertainty over the new government's stand on biodisel.

However, it is not all about straightforward economics.

Finding an overseas market for palm biodiesel can be challenging if protectionism rears its head. In the US, for example, soybean growers want their government to withhold applying a biodiesel tax break on imported fuel. The same may happen with farmers in Europe.

Without the incentives, foreign biodiesel cannot compete with the domestic stuff.

There is another threat – the environmentalists' campaigns against the palm oil industry. Designed to outrage and shame, the campaigns – carrying slogans such “Cruel oil” and “The oil for ape scandal” – allege that the industry has led to deforestation.

These efforts may make it harder for palm biodiesel to gain market acceptance.

Says an industry insider, “The consumers may be swayed by these campaigns and decide that they do not want to use palm biodiesel.”

By now, the Malaysian palm oil industry is experienced in responding to smear campaigns. Yet, there is no cookie-cutter approach, and changing the consumers' mindset can be a painfully slow process.

Industry watchers say the production of biodiesel is not very difficult. Furthermore, the three companies hat have tied up with MPOB have significant exposure to palm oil processing.

It is also significant that these companies have expertise in marketing downstream products.