10/10/2005 (Financial Times UK) - Malaysia may become the first Asiancountry to require the replacement of diesel fuel with biofuel forvehicles and machinery, in an effort to cut costly fuel subsidies andboost the local palm oil industry.

Malaysia's ministry of plantation industries and commodities wants toinclude the mandatory sale of biodiesel in a proposed biofuel billexpected to be submitted for cabinet approval this month, a ministryofficial told the Financial Times.

Biodiesel, a mixture of 5 per cent palm oil and 95 per cent diesel fuel,would be sold from 2007 if the law is approved. Malaysia is the world'sleading producer of palm oil.

The move is in response to increased government spending on fuelsubsidies, including diesel. Higher oil prices are expected to raisespending on fuel subsidies by 34 per cent to MDollars 16bn (Dollars 4.3bn,Euros 3.5bn, Pounds 2.4bn) this year.

Officials estimate the use of biodiesel could reduce Malaysia's demand fordiesel by more than 10 per cent.

Malaysia is planning to build three plants to produce 180,000 tonnes ofbiodiesel for export within the next year. An estimated 500,000 tonnes ofpalm oil out of Malaysia's total annual production of 14m tonnes would beused to produce biodiesel.

Since the 1980s, the Malaysian Palm Oil Board (MPOB) and Petronas, thestate energy company, have been developing technology to convert crudepalm oil into a diesel substitute.

Officials say biodiesel can be used without the modification of dieselengines, while producing cleaner exhaust emissions mandated under theUnited Nations Kyoto Protocol.

Malaysia's biodiesel plants will be operated in a joint venture betweenthe Malaysian Palm Oil Board and several local palm oil plantationcompanies.

Global demand for biofuels was 2.5m tonnes last year and is growing 25 percent a year, with Malaysia aiming to gain a 10 per cent market share."Considering this potential, the government is going to produce biofuel ina big way . . . particularly for Europe," said Abdullah Badawi, the primeminister, when he presented a policy on biofuel development in August.

EU countries are the world's biggest producers of biofuel, most of it madewith rapeseed oil. But palm oil is seen as a cheaper alternative forbiofuel. The EU wants member states to use vehicle fuel with 2 per centbiofuel by this year and 5.75 per cent by 2010.

Although escalating crude oil prices make biodiesel a favoured alternativeto diesel, analysts warn that rising prices for crude palm oil due toincreased global demand will squeeze margins on biofuel production.

JP Morgan estimates the price of palm oil will increase to MDollars 1,610a tonne by 2007, although that is still less than diesel, which is nowpriced at about MDollars 2,000 a tonne.