14/2/06KUALA LUMPUR (Dow Jones)--When palm oil industry participants converge in Malaysia next week for one of their most watched annual events, the one topic foremost on their minds appears to be biofuels.

Since crude oil prices surged to record highs in the latter half of 2005, optimism about the potential for palm oil to break into the energy market as an alternative fuel has been on the rise.

In recent months, key industry players including the Malaysian government and the private sector unveiled plans to build plants to convert palm oil into biodiesel.

With oil prices still hovering at high levels of over $60 per barrel, biofuels and biodiesel are likely to be buzzwords at this year's edition of the annual price outlook conference, traders said.

Organized by Bursa Malaysia, the gathering, entitled POC2006, will be held in Kuala Lumpur Feb. 22-24 and is expected to draw a crowd in excess of 1,300.

"Biodiesel will be part of the picture when talking about the palm oil price outlook for this year," said Derom Bangun, chairman of the Indonesian Palm Oil Producers Association, or Gapki.

Derom is among the list of prominent industry officials and analysts who will present their views at the conference on the likely direction of palm oil prices in 2006.

Other notable speakers include Peter Chin Fah Kui, Malaysia's Plantation Industries and Commodities Minister, Dorab Mistry, director of U.K.-based Godrej International Ltd and a widely-followed price forecaster, James Fry, managing director of LMC International, and Curtis Jones, director of economic analysis at agribusiness giant Bunge.

"They (conference speakers) may talk about a friendly market, reiterating the biodiesel story," said Pradip Desai, managing director of Palmtrade Services, a trading company in India.

Some market participants are already betting on upbeat comments at the conference.

The benchmark third-month April CPO contract has risen about 2% so far in February to breach the MYR1,450 resistance level for the first time this year.

Traders said further gains may be possible in the coming weeks because of the usual "feel-good" factor linked to the conference. In the last 2 years, palm oil prices had strengthened for a period when the conference was held.

Details Of Biofuels Market Size Key To Gains
Sentiment aside, participants will be looking to the conference for answers to some key concerns relating to biofuels and biodiesel.

Major among them is the amount of incentives the Malaysian government is willing to give to biofuel producers.

The government has said it wants to provide tax breaks or subsidies to help spur the growth of the biodiesel sector. However, no formal plans have been unveiled.

Some palm oil industry players have been wary of venturing into biodiesel without the backing of a firm government policy.

"If petroleum prices were to come down, biodiesel may no longer be economical. So, we definitely need subsidies and clear government guidelines to be there so that people know where we are heading," said Wang Jun Ngi, general manager of plantations at TH Group Bhd in a recent interview.

Golden Hope Plantations Bhd, which has been among the more aggressive companies to pursue biodiesel, recently took a step back, saying it plans to review its expenditure in those projects.

"People will want to know what will be the quantity of biodiesel that will be consumed because until today, it's still unclear," Gapki's Derom said.

The outlook for biofuels consumption in Europe, the world's largest producer and user of renewable energy, would be integral to the direction of palm oil prices in 2006.

"The EU will become the focus of attention and after many years, will overtake China as the market of greatest interest," said Dorab Mistry.

News flow on biofuels in the EU hasn't been too bullish lately.

The European Commission's latest strategy to promote biodiesel use in the European Union came as a slight disappointment after a 5.75% market penetration target was left voluntary, contrary to market expectations of a move to make it mandatory.

A recent report by a U.S. Department of Agriculture attache warning of a setback for palm oil use in electricity generation in the Netherlands and Belgium also raised some eyebrows.

Some 400,000 tons of palm oil was used in power plants in 2005, but that number may fall to 100,000 tons in 2006, the report said, citing intense pressure on governments to end subsidies for palm oil because of concerns about the impact of the crop on Southeast Asia's rainforests.

High Stocks May Be A Temporary Concern
On the supply side, a buildup in Malaysian palm oil stocks to record levels in the past few months may dampen on the mood of participants attending the conference.

Palm oil inventories surged to an all time high of over 1.60 million tons at end-November and increased marginally at end-December before declining slightly to 1.54 million tons at end-January.

The 1.5 million ton-mark is an important psychological level.

Traders, however, said participants at the conference are likely to reach a conclusion that the current supply overhang is merely a temporary concern.

Palm oil production growth is expected to moderate in 2006. That should help trim stocks as the year progresses, traders said. In 2005, CPO production rose 7% to 15.0 million tons.

"The forecast smaller growth in CPO production to 15.1 million tons in 2006 after seven years of uninterrupted uptrend in production growth is expected to mitigate the pressure of the higher palm oil carry-over stocks," Malaysian Palm Oil Board's newly appointed director-general Mohd. Basri Wahid said in recent statement.

Higher demand due partly to China's removal of import quotas and stricter U.S. labeling laws against partially hydrogenated soyoil means "the outlook for palm oil prices in 2006 is likely to be positive," he added.

Yet, some key questions are likely to remain unanswered at the conference, Palmtrade's Desai said.

He named India's import policies and South American soybean weather conditions as among potentially market-moving factors that would only be clearer in the months to come, well after the gathering.