25/2/06 KUALA LUMPUR (Dow Jones)--Rising palm oil consumption in 2006, with demand possibly outstripping supply, was the overall consensus at the yearly price outlook conference that ended Friday, participants said.

The positive outlook, however, may not generate much excitement in the palm oil market in the near-term, traders said.

"Of course, it's good for market sentiment to hear all these bullish comments. But, to be honest, there really wasn't any big surprise. The price forecasts were well in line with the range people have been talking about in the market for months," said a Malaysian palm oil trader.

The benchmark May CPO contract on the Bursa Malaysia Derivatives closed at MYR1,492 a metric ton Friday, up just MYR21 or about 1.4% from levels before the conference started Thursday.

Industry officials and analysts who presented papers at this year's edition of Bursa Malaysia's annual palm oil price outlook conference predicted crude palm oil would move between 1,350 ringgit a metric ton on the lower side and MYR1,600 or more on the higher side.

The projected range represents an increase over prices in 2005, when CPO moved between MYR1,250/ton and MYR1,500/ton.

In a keenly-awaited paper, the industry's most closely-watched price forecaster, Dorab Mistry, tipped CPO to move within the upper end of the MYR1,400-MYR1,600 range from now until May.

CPO prices may, then, retreat in the May-June period as South American soyoil hits the world market, he said. The downward pressure, though, isn't expected to last long.

CPO prices are expected to regain its uptrend again in the second half of the year to reach MYR1,600 and beyond, boosted by demand from traditional markets China, India, Pakistan, the Middle East and Africa as well as by growing biodiesel production.

"At the normally expected level of mineral oil at between $50 and $60 per barrel, we must expect BMD CPO futures to trade in a range of between MYR1,400 and MYR1,600 for most of the year," he said.

"On the other hand, greed and fear are not uncommon and I do not rule out a super spike in price levels during the next 12 months," he said.

Palm Oil To Reap Benefits From Rising Biodiesel Demand

Like Mistry, other conference speakers also repeatedly cited the current high crude oil price environment and its positive influences on demand for biodiesel as reasons for their friendly views on prices.

Not surprisingly, all the discussions about the outlook for biodiesel were focussed on the European Union, the world's biggest biodiesel producer and consumer.

The E.U has set a target of replacing 5.75% of its diesel use in the transport sector with renewable sources by 2010.

That, said Thomas Mielke, director of Hamburg-based ISTA Mielke, which publishes OilWorld, could mean biodiesel production rising to 9 million tons by 2010 from over 3 million in 2005.

Currently, the E.U has been dependent on rapeseed oil to fulfill its biodiesel needs. But as capacity grows, room for other oils, including palm oil, is bound to open up.

"Palm oil is best suited to cover the growing world biofuel demand mainly because you don't have to deal with the protein problem," Mielke said.

Oil palm is grown primarily for the oil from the palm fruit, unlike soybeans and rapeseed, which are primarily produced for meal, used as a protein source to feed animals.

Speakers at the conference didn't offer any figures on the exact amount of palm oil that may be used in biodiesel in 2006 or in the coming years.

That was slightly disappointing for the palm oil market as participants had been hoping for clearer details to emerge from the conference, traders said.

However, industry officials said it didn't matter whether palm oil was used in biodiesel production, because even if it isn't, it still stands to benefit from the world's growing interest in alternative fuels.

"Even if it is another oil that is goes into biodiesel, that other oil then needs to be replaced. Either way, there's going to be a vacuum and palm oil can fill that vacuum - be it for biodiesel or for food," said Carl Bek-Nielsen, vice chairman of United Plantations Bhd, a major palm oil producer in Malaysia.

In an effort to kick start the use of palm oil as a diesel substitute in a big way, the Malaysian government plans to start in March a voluntary program for government vehicles to use a blend of 5% refined palm oil with 95% regular diesel, government officials said at the conference.

The emergence of biodiesel may help narrow palm oil's discount to soyoil, usually around $50-$80/ton.

In the past, palm oil has been priced cheaper in order to attract demand from India, where soyoil enjoys significantly lower import taxes.

Lately, however, palm oil prices have been steady despite falling exports to India because new markets have opened up, said James Fry, managing director of U.K.-based LMC International Ltd.

"Part of this new demand has been for novel outlets, such as direct burning as a cheap source of fuel," Fry said.

   Indonesia To Become Largest CPO Producer

Adding to the friendly outlook for prices are expectations of a moderation in palm oil production growth in 2006.

Estimates from officials and analysts so far point to a year of flat or marginal growth in Malaysia's palm oil output around 15.0 million-15.2 million tons. Production stood at 15.0 million tons in 2005.

In the first half, Malaysian output is expected to be lower than in the same period in 2005, because of crop stress.

"The lower production is expected to draw down the stocks level. Hence, the supply fundamentals of Malaysia will be influential in higher palm oil prices," Plantation Industries and Commodities Minister Peter Chin Fah Kui said at the start of the conference Thursday.

Weak Malaysian production growth in 2006, however, would mean that the country will probably lose its position as the top producer in the world, to neighbor Indonesia.

Analysts such as Mistry and Mielke pegged Indonesia's production at 15.2 million-15.3 million tons, up 1.3 million-1.4 million from 2005.

Indonesia's dominance "will continue in the years ahead," Mielke said.

Yusof Basiron, chief executive of the Malaysian Palm Oil Promotion Council, however, said industry players shouldn't be too concerned about the change in ranking.

He said both countries are mutually dependent as 50% of Malaysia's plantations workforce comes from Indonesia while many Indonesian plantations are either owned by Malaysians or led by Malaysian managers.

"So, there should be no unnecessary feelings about being number one or number two. We are producing this resource together for the benefit of the world," he said.