04/10/2007 (Reuters), London - The biofuels bandwagon may be running out of gas with soaring costs for feedstocks like wheat and palm oil prompting producers to shelve planned plants and cut output at existing facilities.

"There are lots of plans (for new plants) now but whether these are going to materialize we simply don't know," Robert Vierhout, Secretary General of the European Bioethanol Fuel Association, told a conference this week.

"In the present circumstances of very high raw material prices, it is understandable if some producers say well it seems to me we need to wait a couple of years until things stabilize."

Biofuels, mainly produced from agricultural crops such as maize, sugarcane and vegetable oils, are seen by many as a way to cut emissions of greenhouse gases and to boost energy security at a time when oil output may be at or near its peak.

Malaysia took the lead in the development of Asia's biodiesel industry but is expected to produce less than 100,000 tonnes of palm oil-based biofuel in 2008 as most producers delay plans due to rising feedstock prices.

"Most of the plants which are now completing construction are not being commissioned as it is just not viable," said M.R. Chandran, an independent industry analyst and former head of the Malaysian Palm Oil Association.

Palm oil prices are just five percent off an historic high of 2,764 ringgit ($727.30) a ton reached in June.

The European Union led by Germany has emerged as the key producing region for biodiesel while United States and Brazil are the top producers of petrol substitute ethanol.

Major tax incentives fuelled Germany's expansion but these have been cut back in recent months, reducing demand and prompting many plants to operate well below capacity.

"If we will not have any change in our regulation in Germany, it is very clear that within the next two years, more or less 50 percent of the capacity in Germany will vanish," Karl Giersberg, chief financial officer for EOP Biodiesel said this week.

Massive government support has also driven the expansion of the biofuels sector in the United States.

EXCESS SUPPLY

"Supply has gotten out in front of demand and that's not surprising considering the enormous support that ethanol has had," said Neil Harl, an Iowa State University professor and ethanol industry consultant.

"We've got a painful period and the most dramatic negative impact of all this is on new investment. Some projects have been dropped," he said.

The fledgling US biodiesel industry has also been hit by rising costs for its key feedstock, soybeans, with prices near record highs.

"They are in more difficult straits. It caught them more in the infancy," Harl said.

Top biofuels exporter Brazil has been expanding output of bioethanol despite tight margins with its production based on sugarcane, a commodity whose prices have been falling.

Its emerging biodiesel sector, which also relies on soybeans, has been under pressure. Brazil will impose a 2.0 percent biodiesel mix in conventional fuel from January 2008.

Even with current high oil prices, fossil diesel is cheaper than biodiesel and current capacity far exceeds demand.

More than 40 biodiesel plants are operating in Brazil, able to produce up to 2.18 billion liters per year, and other 42 projects are being evaluated by the National Petroleum Agency.

This surpasses the demand following the implementation of the government program, of 840 million liters per year. The mandatory mix is expected to be raised to 5.0 percent in 2013.

The biofuels sector has also faced growing public concerns on issues such as whether they really help to reduce greenhouse gas emissions and if they may have contributed to a sharp recent rise in food prices.

Last month, the Organization for Economic Cooperation and Development (OECD) called on governments to cut their subsidies for the sector, saying biofuels may "offer a cure that is worse than the disease they seek to heal."

Many see the solution as so-called second generation biofuels which involve breaking down non-edible crops and even municipal waste by enzymes to create liquid motor fuel.

They are not yet commercially viable but there is heavy investment in research into the area.