26/7/06 (Reuters)   - KUALA LUMPUR: A move by Malaysia and Indonesia to pledge a big chunk of their palm output for biodiesel may not immediately send prices out of control but it has rung alarm bells that the once humble oil will become too expensive for both food and fuel production.

When the world's two leading palm producers last week announced they would set aside up to 40% of their output for biodiesel, global palm oil prices soared more than 3%.

But traders and industry officials said although the decision would provide a firm underpinning for palm prices, the market is unlikely to spiral in the short run as it could take a few more years for green fuel makers to expand production capacity.

Kuala Lumpur and Jakarta will each hope to divert six million tonnes of the palm oil per year for refining into biodiesel.

But analysts estimated that the two countries together now have enough production capability to refine less than half the amount.

“At the moment, Malaysia has approved plants for three million tonnes. It will take four to five years to utilise six million tonnes. We are looking at 2010 or 2011,” said one Malaysian palm oil industry official.

 
Global palm oil prices soar more than 3% following Malaysia and Indonesia plan to set aside 40% of output for biodiesel
“Indonesia will take even longer to use up that amount because at the moment, only five plants have been planned or are under construction,” the official added.

While some traders said the market could cool after the initial surge, others added palm oil will soon lose its status as the cheapest edible oil, as its price was catching up with soyoil.

“Vegetable oils are going to become expensive and get out of the reach of users because many palm oil consumers are developing nations,” said an analyst with a palm oil broking firm.

Biofuels are plant-based fuels including ethanol, which is made from sugar or grains and added to gasoline, and biodiesel, which is derived from oilseeds or palm oil.

“The edge palm oil has over soyoil is that it is cheaper, but it seems that will no longer be the situation,” said M. R. Chandran, an independent commodity analyst.

He said if palm prices keeping rising, buying patterns could change as countries such as India would find it more attractive to import soyoil. The relatively lower import duty on soyoil in India, compared with palm oil, would also shift food buyers to soyoil.

India, which buys 40% of its annual needs of 11 million tonnes, imposes a 45% duty on South American soyoil. But palm oil has several layers of duty that can make importers pay twice as much in tax.

The other big consumers of palm oil are China and Pakistan.

Some analysts said although it might not happen immediately, palm oil prices could rise so high it would no longer be seen as as an economical alternative to fossil fuels. Although, some countries are also looking at biofuels as a way of cutting greenhouse gases.

Industry officials said biodiesel from palm oil would be viable only if prices remained below RM1,600 a tonne.

“The whole economics of palm as raw material for biodiesel will under go a change at RM1,700 or RM1,800 a tonne which people are taking about,” one plantation industry official said.

Palm oil prices have risen about 6% so far this year. On Monday, the benchmark third month October contract in Malaysia was trading at around RM1,565 a tonne, or US$424.

Biofuel plants are sprouting at a dizzying pace as countries from Europe to Asia seek ways to cut dependence on imported oil, curb greenhouse gas emissions and boost local agriculture.

Malaysia has approved 32 out of 87 manufacturing licences, but the country last month stopped approving new producers while the industry works out how to divide the raw material between the food and energy sectors.

Traders said Malaysia and Indonesia might find it difficult to sell large quantities abroad because of policies by some European governments to protect their local biodiesel makers. 

“It will not be very easy to find buyers for this kind of offtake, trade barriers are going to come in the way of biodiesel exports,” he said. Some analysts felt the decision was aimed at boosting prices and cutting stocks which have been building up because of slow exports this year. But others said the policy could also be aimed at encouraging plantation houses to produce more biodiesel.

“There are several mills who have the raw material and are geared up to produce feedstock for the biodiesel industry,” said Ravi Menon of the Malaysian Palm Oil Association. – Reuters