Monday January 3, 10:13 AM KUALA LUMPUR (Dow Jones)--Palm oil prices arelikely to weaken in early 2005, during South America's soybean harvest,but strong demand should offer the market some support, albeit at lowerlevels, for the rest of the year, a top official at a major refinery said.

Ravi Kastia, executive president and business head of India's Aditya BirlaGroup, told Dow Jones Newswires in a recent interview that he expects palmoil prices on average in 2005 to be 5% weaker than in 2004. He didn't givehis expected range for prices in 2005.

Kastia, who oversees Malaysian-based Pan Century, one of the world'slargest palm oil refineries, said the palm oil market is likely to comeunder pressure in the first quarter as South American soybean farmersbegin harvesting what is widely expected to be a record crop.

"However, from the second quarter, demand usually picks up in consumingcountries so that should stabilize prices," he said. "Overall, I expect2005 prices to be lower than in 2004, assuming the Asian rust doesn'tcause any major damage to soybean crops."

The benchmark third-month crude palm oil futures contract on the BursaMalaysia Derivatives ended 2004 at MYR1,387 a metric ton. The contracttouched a year high of MYR2,003 March 4 and a year low of MYR1,365 Oct.18.

Kastia said palm oil prices in 2005 may not weaken if the Asian soybeanrust problem worsens. Instead, palm oil prices would likely rise in tandemwith gains in the soy complex, he said.

The yield-sapping fungal disease has been detected in parts of Brazil inrecent months, but so far there's been no sign of any substantial damageto the country's potential bumper soybean production.

Palm Oil Demand To Stay Strong In 2005

Besides the size of the soybean crop, India's oilseed production could bea key influence on palm oil prices in 2005, Kastia said.

India is one the world's top importers of palm oil and its importrequirements depend on the outcome of its domestic crops.

"So far, the crop situation in India looks normal. I don't foresee anymajor issues on the supply side, so India will probably import about thesame amount as last (marketing) year," he said.

India imported 4.4 million tons of edible oils from November 2003 toOctober 2004, mostly in the form of crude and refined palm oil.

On the demand side, global palm oil consumption is expected to remainstrong in 2005, Kastia said.

"This would be fueled by alternative uses of edible oils such as in thebiofuel sector," he said. "Furthermore, palm oil is the cheapest oil inthe world. All these factors would result in continued high palm oilconsumption in 2005."

The use of vegetable oil as biodiesel gained prominence in 2004 aftercrude oil prices soared to all-time highs, prompting governments worldwideto step up their search for alternative fuel sources.

Most of the world's biodiesel is made from soyoil and rapeseed oil, butMalaysian and Indonesian producers have started to aggressively promotethe use of palm oil.

A weak U.S. dollar would also give palm oil demand a boost, Kastia said.

The U.S. dollar has been on the decline in recent months, touching recordlows against the euro.

"A weaker dollar is good for dollar-denominated commodities, which meanswe can see better demand for palm oil," Kastia said.

Coping With Poor Refining Margins

Negative refining margins due to excess capacity over the years has drivenmany refineries out of business, and Pan Century is one of very fewindependent, non-plantation-backed refineries remaining today.

Pan Century was started in 1978 and has grown to become the world'slargest single-location refinery, with a capacity to process 3,200 tons ofCPO a day. Pan Century also manufactures oleochemicals, with a capacity ofabout 250,000 tons a year, Kastia said.

The group's major export markets are China, India, Pakistan, the MiddleEast and Europe.

"If you look at the way the industry has developed, refining was once ahighly profitable business. But since then, the plantations have come intorefining as well and that has created overcapacity," he said.

For plantations, refining margins are often immaterial because theyeffectively get CPO at cost since they are the producers of the rawmaterial.

In contrast, stand-alone refiners have to buy CPO from plantations atmarket prices - often twice as high as production costs - and, therefore,depend heavily on margins from the refining process.

Staying profitable amid persistently weak margins will continue be themain challenge faced by stand-alone refiners in 2005, Kastia said.

"You have to be very sharp in terms of marketing efforts, what markets yousell to, managing freight and trading continuously. So, whatever you losein refining, you can balance it out through marketing and productionefficiencies," Kastia said. "That is how we have been able to stay ahealthy company all these years."

Expansion into downstream activities like manufacturing oleochemicals suchas fatty acids and soap noodles has helped Pan Century remain viable.

The group is implementing a plan to invest $25 million to further expandits oleochemicals business. Total investments are expected to touch $100million by 2010, helping the group more than double its current capacity,he said.

"The plantations are building capacity in oleochemicals as well," he said,"so now we will have to go one step further and move into making nicheproducts."