Pang Teck Wai, chief executive officer of POIC Sabah Sdn Bhd., said a recent rally in palm oil prices to record highs has put off several biodiesel projects and discouraged fresh investments in the sector.

POIC is a state-owned company overseeing the development of a 5,000-acre industrial park specifically for palm-oil downstream activities in Sabah state, the biggest of its kind anywhere in the world.

"There was a great deal of interest in 2006 in biodiesel. But that has slowed down because of the high prices of CPO," Pang said in an interview.

"Now, we are moving on to non oil-based industries like biomass, fertilizer, cosmetics, phytonutrients - areas that aren't too affected by high prices."

Palm oil prices recently reached a record high, with the benchmark third-month CPO futures contract in Malaysia - one of the world's top producers of the commodity - surpassing MYR2,700 a metric ton.

Palm oil, derived from the fruit of the oil palm tree, is used mainly as a frying oil and in food manufacturing. It can also be converted into methyl ester, a diesel substitute.

In recent years, the industry has been exploring ways of making better use of wastes and residues left behind from the production of palm oil to earn extra income.

Empty fruit bunches are one form of biomass waste that has been of particular interest to investors, as it can be used as feedstock to make many other goods such as pulp and paper, Pang said.

The production of palm oil in Malaysia alone yields more than 17 million tons of empty fruit bunches every year, analysts said.

"We've had interest coming from places like the EU, Korea, Japan to make pulp out of EFB," Pang said, adding that those places are keen to set up plants on the POIC site in Sabah, Malaysia's biggest palm oil producing state.

Pang said there was currently only one pulp mill in the country using EFB, with a 10,000 tons a year capacity.

"The nation can support another 40 to 50 such plants."

There's also growing interest to convert EFB on a commercial scale into a fiber to make packaging products that are a more environment-friendly alternative to styrofoam, which has been banned in markets like Europe, Pang said. 

Biomass To Offset Biodiesel Slowdown 

The growth in non-traditional palm oil-related industries comes as a relief to POIC, which is finding it more difficult to attract biodiesel investments to its site in Lahad Datu.

"The biomass side will help take care of the slowdown on the oil side," Pang said.

POIC's site was to be home to 20 biodiesel projects, the highest concentration of biodiesel plants anywhere in the country.

Most of these projects, however, have been delayed because rising palm oil prices have rendered the use of the commodity as a fuel alternative unprofitable.

"At least half (of the projects) would have been in operation otherwise," Pang said.

Still, two large plants built much earlier have since been completed and are set to begin operations soon, he said.

An Australian-owned 100,000-ton-a-year capacity plant is already conducting trial runs, while a South Korean-owned 200,000 ton plant is expected to start in September.

POIC has completed the development of 1,150 acres, including infrastructure, and is set to open up another 1,000 acres of land next.

"We are looking at 8 to 9 million tons of oil to flow through Lahad Datu in five to eight years from now," Pang said, adding that it aims to be the refining and logistics center for CPO from the neighboring Indonesian province of Kalimantan.

Pang conceded that for that target to materialize, POIC would need significant processing and refining capacity at its site.

There are already four refineries, with a combined capacity of 2.5 million tons, operating nearby.

Another five projects with a total 2.2 million tons of capacity have been started.

However, like in the biodiesel sector, high prices have also slowed the progress of refinery projects.

"(New refiners) are also waiting to see what impact the mergers will have on the industry and on prices before they start operating," Pang said, referring to the ongoing mergers of Singapore's Kuok Group and Wilmar International and Malaysia's Sime Darby-Kumpulan Guthrie-Golden Hope Plantations.