24/11/006 (Reuters) 0  KUALA LUMPUR - Palm oil prices are expected to rise further by early next year as stockpiles decline due to robust global demand ignited by the rapidly expanding biofuel industry, a leading analyst said on Friday.
 
Crude palm oil prices are expected to rise around 11 percent to 2,000 ringgit (US$550) a tonne from around 1,800 ringgit a tonne, said James Fry, vegetable oils analyst and managing director of London-based LMC International Ltd.
"We are moving into a market balance where demand is growing faster than supply, thanks to biodiesel," he told Reuters in an interview in the Malaysian capital.

"We are seeing the price moving up towards the 2,000 ringgit level in the early part of the next year."

Fry's bullish comments triggered buying in Malaysian crude palm oil futures, which jumped more than 2 percent on Friday, assisted by firm soyoil prices.

The benchmark February contract on the Bursa Malaysia Derivative exchange finished up 40 ringgit at 1,876 ringgit a tonne. Crude palm oil prices have risen by around a quarter this year.

"The comments were very market friendly, there was good buying in the evening session," one dealer said. "Stocks are likely to decline and we are entering the low production months."

The global use of biofuels -- made from sugars, cereals and vegetable oils -- is expanding rapidly as nations from Europe to Asia seek ways to reduce dependence on fossile fuels and cut greenhouse gas emissions.

Fry said Malaysian palm oil reserves, a key demand indicator, are likely to fall to 1.25 to 1.3 million tonnes in the first half of 2007, compared with the record of 1.799 million tonnes in September.

"The stocks in Malaysia, which are the sign of tightening or easing market, will come down and that is an indication why the prices should be stronger."

Malaysia is the world's largest producer of palm oil which is used in products ranging from food and soap to cosmetics and biodiesel.


PETROLEUM, BIODIESEL

A decline in petroleum prices in unlikely to dampen the momentum of the edible-oil based biodiesel industry because of tax breaks and legislation in Europe, which makes the use of renewable fuels mandatory.

"Nowhere in the world is biodiesel competing without some incentive -- it is either a compulsory blend or it is a tax incentive," Fry said on the sidelines of an industry seminar.

"As long as you have those working it does not matter if crude palm oil is more expensive than diesel."

He added, "Rapeseed oil has been for a long, long time more expensive than crude oil, but it is still used for biodiesel in Europe because of these incentives."

The European Union has set a target of 5.75 percent for biofuels' share of total motor fuel use by 2010. These fuels are mainly bioethanol and biodiesel.

Industry body the European Biodiesel Board says it will continue to favour home-grown raw materials over imported raw materials such as palm oil so long as subsidies and government incentives are in place.

Asian companies are eager to supply biodiesel or palm oil to Europe to gain a slice of the continent's growing green fuel market but analysts say their hopes are likely to be dashed by protectionist barriers.

But Europe's dependence on palm oil will continue to grow in coming years because of the increasing use of locally produced rapeseed oil to make biodiesel, Fry said.

"It is not possible for them to stay without palm oil, as it is economically attractive for them to use palm oil and it is not genetically modified.

"The biodiesel demand and the preference for European crops have taken so much of rapeseed that you have to look for other oils to fill the gap."

Biodiesel consumed about 45 percent of Europe's rapeseed oil output last year, leaving some major food producers scrambling for material to cover their needs. (US$1=3.633 ringgit)