03/01/2008 (Financial Times) - The prospect of crude oil staying above $100 a barrel is pushing the price of palm oil to record highs as the commodity is increasingly made into biodiesel, an often cheaper alternative to petroleum-based fuels.

The benchmark March crude palm oil contract on the Bursa Malaysia derivatives exchange climbed as much as M$77, or 2.5 per cent, to a life-time high of M$3,159 ($956) per tonne before closing at M$3,136 on Thursday.

The price of crude palm oil has risen 12 per cent in less than a month and 125 per cent since the middle of 2006, when the rally began.

Analysts believe the bullish trend is likely to continue at least into the second quarter of 2008 unless there is a collapse in the crude oil price, which touched the $100 per barrel level briefly on Wednesday.

The correlation between palm and crude oil prices highlights the growing interest in alternative fuels, but has also become a source of concern among the majority of palm oil consumers who rely on it for more traditional uses.

Palm oil is versatile: 90 per cent of the total produced is used in cooking and in food such as margarine, and as an important component of soaps and cosmetics. Only 10 per cent is used as fuel.

It can be mixed raw with traditional diesel, or, like other vegetable oils, can be combined with alcohols and processed into biodiesel.

This ratio is likely to change as the world seeks to find cleaner fuels to replace crude oil.

The Indonesian government is so concerned about the impact of rising palm oil prices on domestic supplies that it has hiked crude palm oil export taxes several times last year to help combat soaring cooking oil prices.

Inflationary pressure has been exacerbated by the sharp rise in prices for other vegetable oils: soyabean oil recently hit 52.43 cents a pound, surpassing the previous 1974 high, and rapeseed oil broke the €1,000 per tonne level.

Analysts say the relationship between crude oil and palm oil prices is not so strong that any fall in the former will be fully reflected in the latter because palm oil prices can still find support in the fundamentals of the vegetable oil market.

Dorab Mistry, a director of Godrej International, the Indian chemicals group, and a leading industry analyst, says palm oil is relatively cheap compared with other vegetable oils and demand in high-population countries such as China and India continues to be strong.

Chris de Lavigne, an analyst with research firm Frost & Sullivan, believes crude palm oil will climb to M$3,334 per tonne in the next three months before correcting slightly in the second quarter.

“The overall demand for vegetable oils is outstripping supply,” he says.

“What you’re seeing from the soy perspective is that Argentina and Brazil have had bad weather. That’s going to have an impact throughout the year, and if soy prices remain high, you can bet your bottom dollar that palm prices will remain high.”

Weather forecasts for 2008 are also seen to be unfavourable to vegetable oil crop harvests.

Crude palm oil prices rose 53 per cent last year and would have risen much further if new Indonesian supply had not come on stream.

“The new Indonesian supply is rescuing the market from going even higher,” Mr Mistry says.

Indonesia overtook Malaysia in 2007 to become the world’s largest producer.

But concerns remain about the environmental impact of the industry’s growth, particularly in Indonesia, where massive tracts of forests have been cleared make room for palm plantations.