20/4/06 KUALA LUMPUR (Dow Jones)--The palm oil industry isn't concerned about a recent buildup in inventories, as it isn't an accurate reflection of demand, which is strong, a top Malaysian industry official said Thursday.

Yusof Basiron, chief executive of the Malaysian Palm Oil Council, said current firm palm oil prices are clear evidence that the supply and demand balance isn't bearish.

Malaysian palm oil stocks ended 2005 at an all-time high of 1.6 million tons, only to hit another record of 1.65 million tons in February.

But so far this year, the benchmark three-month CPO futures contract has remained comfortably above its key psychological support level of MYR1,400 a metric ton.

Yusof, who is also chairman of plantations company TH Plantations Bhd, joined MPOC this year after retiring as director-general of the Malaysian Palm Oil Board, a post he held for over a decade.

The council is the industry's marketing arm, while the board is the government's palm-oil licensing, regulatory and research arm, and is responsible for releasing official production, exports and stocks data.

"To the industry these days, 1.6 million tons is no longer a big issue," Yusof told Dow Jones Newswires.

He said the high stocks are temporary and the most recent increase is due to seasonal factors, such as a slowdown in shipping and export activities due to religious festivals.

     Palm Oil Demand To Stay Strong

Yusof said the outlook for palm oil in 2006 remains bullish.

Output in Malaysia, the world's largest producer, is expected to be up only marginally at 15.2 million tons, compared with 15.0 million tons in 2005.

On the buy side, interest in palm oil is expected to stay strong globally, helped by a removal of an import quota system in China; the demand for other oils to replace hydrogenated soyoil in the U.S.; and continued demand from India, Yusof said.

He said that last year, the number of countries importing more than half a million tons of Malaysian palm oil a year increased to seven: China, India, Pakistan, Bangladesh, Egypt, U.S. and the European Union.

Besides traditional consumers, developing countries like South Africa, Russia and those in the Central Asian region look set to favor more palm oil in the coming years, he said.

Rising crude oil prices, which hit record highs this week, have also created a new market for palm oil as an alternative fuel source, he said.

Palm oil, which is cheaper than mineral oil, is increasingly being blended with medium fuel oil in power plants. High oil prices have also spurred interest in converting palm oil into biodiesel for transport.

Yusof's optimism about demand echoes the recent views from influential industry analysts such as Dorab Mistry, a closely followed price forecaster, who have also forecast strong demand and firm prices this year, due partly to biofuels.

Yusof said that while biodiesel is a positive development for the palm oil industry, companies wanting to get involved need to consider the risks.

"There is some risk because if palm oil prices go up, then export margins will be squeezed," he said.

Those who want to get involved should find a partner who can absorb their export volumes, he said.

    Says Criticism Of Palm Oil Linked To Soyoil

Yusof slammed interest groups in the U.S. and in Europe that say palm oil is harmful to health and the industry contributes to the destruction of rainforests.

Most recently, the U.S. Center For Science in the Public Interest, an independent consumer-advocacy group which focuses on the food industry, took out full page advertisements in U.S. newspapers saying the palm oil industry causes loss of habitats of endangered wildlife like orangutans.

Yusof charged that the criticisms are linked to newly introduced restrictions against soyoil. Soyoil, made from soybeans, is a major U.S. agricultural export.

Partially hydrogenated soyoil has been a staple ingredient in the manufacturing of food products like cookies in the U.S for decades.

However, recent concerns that trans fatty acids in hydrogenated soyoil cause heart diseases prompted the U.S. government to enforce strict labeling laws.

Palm oil, which doesn't contain trans fatty acid, has been touted as a possible replacement for soyoil.

Yusof said that unlike other oilseeds crops, the palm oil industry doesn't get any government subsidies.

"(Critics) like to talk about sustainability of palm oil...when their own product in their own countries cannot be considered sustainable because they are subsidized in such a huge way," he said.