KUALA LUMPUR, March 3 (Bernama) -- The rise in petroleum prices over thepast two years has increased the average production cost of vegetable oilto between US$20 and US$30 per tonne.

Managing director of LMC International Ltd, Dr James Fry, said the linkbetween the energy market and the oilseeds sector is via the energyrelated costs of growing, processing and transporting products.

However, he added that it was difficult to be more precise about theimpact since the prices of different forms of energy have increased atdiffering rates, and it is also somewhat arbitrary how the higher costsare allocated between oil and meat.

Besides direct fuel use, other fuel derived inputs, such as fertilisers,are also important components of costs on oil palm estates, he said.

For oil palm plantations, there is a further connection between energyprices and vegetable oil production decision, Fry said.

"It was well known that rubber was the main plantation crop that made wayto allow oil palm to develop in the past, but over the past years or so,as palm oil prices have fallen, natural rubber prices have risen, helpedby the petroleum-based synthetic rubber market," he said.

Hence, enabling rubber to compete more effectively with oil palm whenfarmers choose what to plant, he added in his paper entitled "EnergyPrices and the Oils Complex: Implications for the Price Outlook in 2005"at the Annual Palm & Lauric Oils Conference & Exhibition.

In the case of lauric oils, palm kernel and coconut, Fry said there hasbeen a clear benefit from high energy prices since the price of ethylene,which is the raw material for synthetic oleochemicals, has gone upstrongly and helped lauric oils to resist the decline in crude palm oil(CPO) prices.

He said among the factors influencing the CPO prices was the increasinginterest in bio-diesel fuel.

He added that there has been a rise in bio-diesel output which helped tolift EU rapeseed oil prices, in particular, with knock-on effects onsunflower oil prices since European consumers tend to favour these twooils.

"(However), it is curious that the EU, which has a large vegetable oildeficit, should be so active in promoting the use of bio-diesel, therebyraising its oil imports requirement, while the big exporters of vegetableoil, like Malaysia, have been reluctant to invest in bio-diesel capacityeven though palm oil sells at much lower prices than rapeseed oil," Frysaid.

On the other hand, he noted that India's import tariff policy, whichfavours soya oil, was also continuously haunting the palm oil market.

It affects palm oil exporters in more than one way, especially the recentrequirement of a minimum CPO beta carotene content and the rules used tocalculate Indian import tariff, he said.

"The unpredictable way in which the government decides the tariff valuesto apply to imports is undoubtedly an irksome practical problem for Indianimporters," he added.

Until February 2001, the two oils faced the same tariff and the advantagefor soya bean oil has varied but the surprise announcement in mid-Februarythis year of a further rise in the tariff on CPO has pushed thedifferential between the two rates to an all-time high.

Last month, India increased the import duty on CPO to 80 percent from 65percent while import duty on refined palm oil was raised to 90 percentfrom 75 percent but duties on soya bean oil remained unchanged at 45percent.

Fry said the major blow for palm oil exporters, however, arises as aresult of the application of different import tariffs on crude oil andrefined, bleached and deodorized (RDB) olein and on palm oil in relationto soybean oil.

India's lower tariff rate on CPO than on RDB olein has spurred thedevelopment of India's coastal refining industry, depriving Malaysianrefiners of their most important export outlet, he added.

"Even more important, in practice, is the indirect impact of India's crudeoil imports tariffs upon the global discount for palm oil on soya beanoil," he said.

As a major importer of both palm oil and soya bean oil, Indian buyers areinevitably sensitive to any imbalance between the landed tariff-paid priceof palm oil and the landed tariff-paid price of soyabean oil, Fry said.

"Thus, in their import-buying decisions Indian traders play a major rolein determining the global market's price differential between the world'stwo major vegetable oils," he said.

Given these factors and others in 2005, Fry said the CPO price on BursaMalaysia Derivatives was expected to go up to RM1,400 per tonne, beforefalling below RM1,200 in the last months of 2005, which would be slightlyunder the long-run trend in real CPO prices.

-- BERNAMA