16/3/06 SINGAPORE(Reuters) - Living in one of Asia's most polluted cities has piqued Putut Andanawarih's interest in a cleaner form of fuel known as biodiesel.
 

The Jakarta-based fund manager finds such "green fuel" even more appealing because of the potential impact on his portfolio of palm oil plantation stocks.
High crude oil prices and a European Union-led drive for cleaner and renewable energy have boosted the development of alternative fuels including ethanol, extracted from corn or sugarcane, and biodiesel, made from rapeseed, soya or palm oil.

As little or no change is required in order for conventional diesel engines to use these biofuels, analysts hope more vehicles will mix these into their regular fossil fuel diet.

Recent interest in biofuels has driven a rally in shares of Malaysian and Indonesian palm oil plantation companies, sending shares in Malaysia's IOI Corp. and Indonesia's Astra Agro Lestari to all-time highs.

Analysts reckon these plantation stocks stand a good chance of being re-rated with higher earnings and share price forecasts, particularly as the impact of biodiesel on global supply and demand for edible oils becomes clearer.

About 80 percent of the world's palm oil, which is used for cooking oils and margarine, is grown in Malaysia and Indonesia.

"What we see in biodiesel is a future potential for increased demand for palm oil, driven by the energy sector," said Andanawarih, investment director at Australian fund manager First State Investments in Jakarta.

Andanawarih has been adding to his positions in Indonesian plantation firms such as Astra Agro, London Sumatra and Bakrie Sumatra Plantation, and in Malaysia's IOI Corp. and Golden Hope.

Subramanya Bettadapura, energy and power analyst at research consultant Frost & Sullivan, said biodiesel output in Europe was likely to increase 10 percent this year from around 3 million tonnes in 2005. Production in the United States could top 1 million tonnes, compared with 750,000 tonnes in 2005.


BULLISH EXPECTATIONS

US President George W. Bush also gave a boost to green fuels with his recent rallying call for improving technologies to cut Middle East oil imports by 75 percent by 2025. The common alternative fuel in the US is ethanol.

Ivy Ng, analyst at CIMB in Kuala Lumpur, noted that most plantation stocks have outperformed the market and palm oil prices in the past year, suggesting some of the bullish expectations might have already been priced in.

"Investors will have to be very selective," said Ng, whose top Malaysian picks are Golden Hope and Asiatic Development

Ng said she expects the price of crude palm oil, currently around 1,400 ringgit per tonne, to hit 1,580 ringgit this year, and shares in Golden Hope and Asiatic could rise 15 percent and 10 percent, respectively, by the year-end.

PPB Oil Palms and United Plantations provide a pure play on palm oil and exclude other businesses such as property and rubber, Ng said.

In Indonesia, she likes Bakrie Sumatra, which is controlled by the family of cabinet minister Aburizal Bakrie.

Some foreign investors are still wary of investing in Indonesian plantation stocks such as Bakrie Sumatra, Ng said, as many of the big business groups defaulted on their foreign debts during the 1997-98 financial crisis.

However, Andanawarih said most of the Indonesian plantation firms have since restructured and now have much healthier books with manageable levels of debt.


BOOMING CONSUMPTION

So far, the use of palm oil as feed stock for biodiesel is minimal, Bettadapura said, as just 1 percent of biodiesel made worldwide last year came from palm oil.

"But things are changing fast," he added.

The European Union, which has set a non-binding target of 5.75 percent biofuel content by 2010, last year turned into a net importer of rapeseed oil and soyabean oil for the first time, according to Hamburg-based industry publication Oil World.

"About 95 percent of the current demand growth is due to booming consumption of oils and fats for biofuels, primarily for the production of biodiesel," Oil World said.

Malaysia, the world's biggest palm oil producer and exporter, has already started to build plants which will next year supply a hybrid fuel made up of 95 percent diesel and 5 percent palm oil.

Malaysian plantation firm Kulim Bhd. has teamed up with Germany's CremerOleo GmbH & Co. to set up two biofuel plants, one in Malaysia and one in neighbouring Singapore.

All good news for Andanawarih's plantation stocks, even though the Jakarta resident is unlikely to get much reprieve from the smog hanging over his city.

While Indonesia, the world's second-largest palmoil producer, wants to become the world leader, it has no plans to encourage biodiesel at home.