AMSTERDAM/KUALA LUMPUR, May 5 (Reuters) - Asian palm oil exporters couldsupply up to 20 percent of the European Union's biodiesel needs by 2010,as the grouping hastens steps to curb fossil fuel use and limit greenhousegas emissions.Such a scenario would mean bigger imports from Malaysia and Indonesia, thechief of Fediol, the European Union's vegetable oils federation, toldReuters in an interview.

It would brighten prospects for Asian palm traders struggling to competewith South American soybean oil in their key market, India, where theyalso face an unfavourable duty structure.

"Companies need to make not very significant changes to start processingmore palm oil into biodiesel," Pascal Cogels, the European federation'sdirector-general, said recently. "It doesn't require big adaptations toequipment."

The EU imports about 3.5 million tonnes of refined and crude palm oilevery year, chiefly from Malaysia and Indonesia.

Biodiesel capacity has been rising in Europe over the past several years,and biofuels that turn organic matter into energy are seen as anenvironmentally responsible alternative to fossil fuels.

EU governments are trying to promote use of biofuel, notably biodieselderived from vegetable oils, and ethanol, which can be produced fromgrains, sugar or biomass.

Fediol says about 20 percent of Europe's biodiesel could come from palmoil in the next five years, or between 300,000 and 350,000 tonnes ofadditional palm oil imports.

Total biodiesel output by the 15 Western EU members rose to an estimated1.85 million tonnes last year, from 1.45 million in 2003 and 1.05 milliontonnes in 2002, Fediol data shows.

Rapeseed oil now makes up between 80 and 85 percent of the biodieselproduced by the bloc, with soybean oil and a marginal quantity of palm oilaccounting for the rest.

PRICE THE KEY

But if price is what matters, palm oil, already one of the world'scheapest vegetable oils, looks set to capture a handsome share of the EUbiofuels market in the longer run.

"This is getting more and more evident in the U.K., where people would gofor whatever source is cheapest and easily available," Cogels said.

Malaysian palm oil shipments to India that once exceeded 200,000 tonnes amonth, amount to barely half that now, thanks to fierce rivalry from SouthAmerican soybean oil.

India's import duty structure, which taxes palm oil heavier than soy, doesnot help.

In contrast, Malaysian palm oil exports to the EU have stayed at more than200,000 tonnes a month since January.

"Although India remains an important market to Malaysian palm oil, itwould do well for us to start thinking of Europe's biodiesel potential andhow to tap that," said S.J. Dhass, an official at Bell Group, Malaysia'slargest oil palm miller.

Some Malaysian firms have already started doing just that.

Leading oil palm planters IOI Corp and Kuok Oil & Grains are separatelybuilding two refineries in Rotterdam to process more than one milliontonnes of palm oil a year.

Industry experts are convinced the plants will deliver much-needed supplyto Europe's biodiesel plants in future.

A 100,000-tonne biodiesel plant, partly owned by British supermarket giantTesco , is also expected to come onstream on England's east coast by nextyear, expanding the potential for green fuels such as palm.