10/4/06 KUALA LUMPUR (Dow Jones)--Expectations in the palm oil industry for biodiesel sales to Europe may be premature, as trade barriers look likely to limit market access, a European biofuels industry official said.

Instead, the industry should focus on supplying the bioenergy, or electricity generation, market, which holds more potential, said Edgare Kerkwijk, chief financial officer and head of Asia of Netherlands-based biofuels trader Biox Group B.V.

However, the use of palm oil in the bioenergy sector is limited at the moment because hype about biodiesel has kept the commodity at prices beyond buyers' reach, he said.

"There's many times more potential for palm oil to go into energy. But unfortunately, people are not looking at it, but looking only at biodiesel," Kerkwijk told Dow Jones Newswires.

"Everyone is saying (biodiesel) will go to Europe. We don't think it will go to Europe in such big amounts as people expect," he said.

Kerkwijk said recent remarks from Malaysia's Trade and Industry Minister Rafidah Aziz warning against overexuberance about biodiesel were a timely reminder to the industry.

The Malaysian government has approved about 14 biodiesel projects and received another three-dozen applications, prompting Rafidah to express concern that some companies may be jumping in without proper understanding of the business.

The palm oil industry is banking on the European Union, the world's biggest biofuels producer and consumer, to import biodiesel made from palm oil, to help feed the region's growing demand for renewable energy sources.

Recent developments suggest, however, the palm oil industry may face some disappointment, Kerkwijk said.

The E.U. is working on a long-term energy policy, and initial discussions have included a push for some restrictions on the imports of biofuels like ethanol and biodiesel.

"So, the comments from the stakeholders is that they want to restrict somehow the imports of biodiesel through either a quota system or import tariffs or a combination of both. People were probably thinking that palm oil biodiesel will come into Europe without any restrictions. But it looks like that isn't going to happen," Kerkwijk said.

Biodiesel Buzz Hurting Palm Oil Demand

Caught up in the buzz surrounding biodiesel, the industry may be in danger of missing out on an actual ready market in bioenergy.

In 2005, about 1.0 million-1.5 million tons of palm oil was used as fuel in power plants in Europe, Kerkwijk estimated. More than a third of that was supplied by Biox, which specializes in the trading of edible oils for energy.

Kerkwijk said there is room for more palm oil to go to the energy sector in 2006 and beyond. However, the commodity's current high price is a hindrance.

"Because of this biodiesel hype, palm oil prices have remained quite high. At that high level, our clients are actually quite hesitant to buy," said Kerkwijk.

He said a recent surge in palm oil stocks is evidence that palm oil prices may be overvalued.

Malaysian palm oil stocks reached an all-time high of 1.65 million tons at the end of February, although they declined slightly to 1.59 million tons at the end of March, according to data from the Malaysian Palm Oil Board.

Buying interest in the energy sector can be expected to strengthen if crude palm oil prices ease to $400/ton, CIF Rotterdam, Kerkwijk said.

Currently, CPO is offered around $430/ton and above in Rotterdam.

To attract more demand from Europe, the palm oil industry should also step up efforts to become more sustainable.

The industry has been criticized by conservation groups in Europe and in the U.S. for causing environmental problems, including the destruction of rainforests.

While the burning of palm oil as fuel in power plants is popular because it is a clean and renewable energy source, European governments and consumers are increasingly questioning the environmental-friendliness of its production.

"The industry is willing to buy more palm oil...but palm oil should be more and more sustainable, because energy companies are asking for it and government policy is pushing them toward that direction," Kerkwijk said.

Carbon Credits Can Boost Plantation Incomes

Biox plans to work with its suppliers, namely plantation companies in Malaysia and Indonesia, to ensure production is fully environment-friendly.

It's aiming to implement clean-development mechanism projects at the palm oil mills of its suppliers to reduce carbon emissions.

"If you reduce CO2 emissions, then under the Kyoto Protocol, you can get carbon credits and those are potentially additional income for the plantations," Kerkwijk said.

Biox would then be able to buy palm oil that meets the sustainability requirements of its customers and at the same time earn carbon credits that it could jointly sell with plantation companies to potential buyers in Europe.

Biox is also planning to develop its own oil palm plantations in Southeast Asia through joint ventures.

Kerkwijk said the company will seek the advice of non-governmental organizations to identify areas suitable.

"Compared to buying an existing plantation, it will take longer to get the oil. But from the moment you start, you can actually do everything right. You have a clean history," he said.