19/4/07 (Business Times)   - MALAYSIA'S crude palm oil (CPO) prices have soared to record levels, but, ironically, may also hurt another equally lucrative and rejuvenated sector - palm oil-based biodiesel.

This is because CPO, the main raw material needed to make biodiesel, is set to become more expensive than the selling price of biodiesel.

Industry players said that demand for biodiesel as well as earnings of the companies may be affected if CPO prices remain too high in the near term.

As at March, the Government had approved 90 biodiesel licences, of which five plants are already operating with a total palm oil feedstock requirement of 350,000 tonnes. Five more plants are set to come on stream this year.

"Biodiesel prices are now ranging between RM2,400 and RM2,600 a tonne compared to CPO current price levels of RM2,200.

"CPO prices still have the potential to climb further to RM2,300 and RM2,400, and when that happens, biodiesel players' profit margin will be squeezed and their pockets will be hurt," said a Malaysian Palm Oil Association official.

Frost & Sullivan's vice president for growth consulting, Chris De Lavigne, said that with CPO prices at RM2,200 a tonne and biodiesel being sold at no more than RM2,550 a tonne, the latter is barely viable.

Golden Hope Plantations Bhd group chief executive Datuk Sabri Ahmad said the current high CPO prices are painful for non-plantation companies.

This is because, unlike plantation companies, those which do not own estates will not be able to cushion the effects of low biodiesel prices and cannot enjoy the high CPO prices.

Industry experts said CPO prices have the potential to touch RM2,400 a tonne in the second half of this year, much earlier than projected, and could climb to a 10-year high of RM2,800 should there be a natural disaster.

A Malaysia-based biodiesel plant builder said plant owners are already complaining about the current situation, and those who have yet to start building plants are either cancelling or postponing their plans.

"Biodiesel players are reluctant to buy up to six months forward of palm oil due to the current scenario," said the builder.

He said that if CPO prices stay at the current level of RM2,250 a tonne and biodiesel retails at RM2,600 a tonne, players can still make some profit.

"But if CPO prices climb above RM2,300 and biodiesel drops to below RM2,300, then they will have problems."

The US-based Trade News Service publisher Dennis Maxfield said that as long as oil stayed at the US$60 level or higher, biodiesel output would be feasible.

However, the biodiesel plant builder said the sector should not worry as CPO prices were too high and should be correcting in the near-term to a more favourable level of RM2,000 a tonne.