6/2/06 KUALA LUMPUR (Dow Jones)--With global oil prices remaining high, palm oil prices are expected to move to a higher range in 2006 as the commodity stands to benefit from the expansion of the global biofuels industry, a Malaysian plantations industry executive said.

"CPO prices should be better in 2006 than in 2005. All the excitement about biodiesel will help push up the price," said Wang Jun Ngi, general manager of plantations at TH Group Bhd.

"People are talking about a range of MYR1,400 to MYR1,600. I think it shouldn't be a problem," he said.

In 2005, the benchmark third-month CPO futures contract moved in a range of MYR1,250 to MYR1,500 a metric ton.

The contract was trading around MYR1,442/ton at 0345 GMT Monday.

Although prices are expected to be firmer in 2006, the forecast range is still far off historical highs of over MYR2,000/ton.

Wang said, however, high prices may not necessarily be positive for the industry.

"A figure of around MYR1,500 to MYR1,600 is a very fair (price) at which suppliers and buyers are comfortable. If you have prices too high, you may risk chasing away the buyers and you may not even be able to do biodiesel," Wang said.

Recently, Plantation Industries and Commodities Minister Peter Chin said he preferred CPO prices to be stable as overly high prices could hurt margins for downstream activities.

Malaysia is the world's biggest CPO producer, but the bulk of its palm oil are refined and further processed before being exported.

The biodiesel sector is expected to be an important market for palm oil in 2006 and in the coming years.

Demand From Traditional Markets Also Growing

Along with rising demand from the biodiesel sector, China's removal of import quotas for edible oils and a U.S campaign against trans fats are also expected to boost the consumption of palm oil in traditional food applications.

However, new uses such as for biodiesel would offer the strongest growth potential.

Wang said rising biofuels demand doesn't appear to be just a passing fad linked to surging crude oil prices, because major markets such as the European Union have set biodiesel consumption targets mainly for environment and conservation reasons.

"Currently, the E.U is using a lot of rapeseed oil. I doubt rapeseed alone will be enough to cater to all their needs. The other oils, including palm oil, will have to come into play," he said.

Even if palm oil isn't used as a fuel source, it would still indirectly benefit from Europe's biodiesel program, he noted.

"The use of rapeseed oil for biodiesel will create a vacuum in the market for edible oils for food applications. The effect of more rapeseed oil being taken off the (food) market means that palm oil sales will increase," he said.

The TH Group itself is keen to venture into biodiesel, though it's taking a cautious approach for now as it waits for more details on the Malaysian government's policies, Wang said.

The government is scheduled to present, later this year, its biodiesel policy, which is expected to include subsidy schemes and tax incentives.

Wang said TH Group's potential move into biodiesel would likely be in the form of a partnership with other industry players because of its small size.

Malaysian Output Seen Rising Further This Year

Comparatively higher productivity levels in east Malaysian plantations and good weather may help boost Malaysia's overall palm oil output this year, Wang said.

Malaysia produced 15.0 million tons crude palm oil in 2005, up from 14.0 million tons in 2004.

"Maybe we can see an additional 300,000 tons in 2006. The weather has been quite good over the past few years, so we don't expect to see low yields this year," Wang said.

Going forward, the TH Group plans to continue expanding its plantation hectarage, Wang said.

The group currently has a total oil palm planted area of 11,544 hectares in Sabah and produced 93,221 tons of CPO in 2005, up from 92,696 tons in 2004.

With good land in Sabah fast running out, the company is targeting neighboring Indonesia for further expansion, particularly in the nearby south and central Kalimantan areas.

Within Sabah, available land in the more favorable east coast area has become scarce, leaving mainly the drier west coast area for new plantation projects, he said.

"The land may be there, but if it's dry, it does not make business sense for us to go there," Wang said.

Sabah and Indonesia's Kalimantan are both on the Borneo island.

"In terms of cost, Indonesia is cheaper. In terms of yields also they are higher because their soil is very good," Wang said.

Currently, the TH Group's productivity levels make it one of the most efficient plantations companies in the country.

The company's yield stood at 29.3 tons of fresh fruit bunches per hectare in 2005, with an oil extraction rate of 21.82%.

That compares with the 2005 national average FFB yield of 18.88 tons and an OER of 20.15%.