20/8/06 (The Edge News)   - The government’s plan for the mandatory use of 5% palm oil content (biodiesel) in diesel by January 2007 may hit a snag if production of biodiesel becomes too expensive due to the rise of crude palm oil (CPO) prices, analysts said.

CPO prices, according to the analysts, are expected to hit RM1,600 to RM1,700 per tonne in the next two years from the current year-to-date average of RM1,520 due to rising demand from the food and biofuel sectors.

The government is looking to table the biofuel industry bill this month, which would see all diesel sold having the mandatory 5% palm oil content.

In his sector report, OSK Investment Research analyst Alvin Tai: “As palm oil’s main usage is for food purposes and energy usage represents additional demand, CPO prices could surge beyond the equilibrium point.”

Tai said if crude oil prices are at RM2,020 per tonne, palm oil-based biodiesel is feasible provided CPO prices do not go beyond RM1,777 per tonne. Beyond that, he said, biodiesel use would become economically unfeasible.

Malaysian Palm Oil Board chairman Tan Sri Haji Basir Ismail said recently that CPO prices could be on the rise. If crude prices go higher, biodiesel goes higher.

"It (crude price) is likely to go higher, and by end of the year you could get palm oil prices reaching RM2,000 per tonne,” he added.

However, an industry player believes the government’s biodiesel plans could go ahead even if CPO prices surpoass Tai’s quoted RM1,777, but only “up to a certain point”.

“Of course, biodiesel could be subsidised the way fuel is subsidised today, but I can’t say for how long. High CPO and the use of biodiesel, however, will be good for the plantation companies and owners,” he added.

In a recent paper, United Plantations Bhd’s senior research manager Mukesh Sharma M Sharma said the total global production of CPO in 2005 stood at 33.33 million tonnes, with Malaysia and Indonesia jointly accounting for 85.7% of that.

Plantation Industries and Cooperatives Minister Datuk Peter Chin Fah Kui has said that demand for all vegetable oils would reach 169 million tonnes by 2020 from the current 90 million tonnes, especially if biodiesel is adopted by many countries.

Malaysia and Indonesia have also jointly announced their commitment with each annually allocating six million tonnes of their CPO production for biodiesel use, which would lead to more CPO for biodiesel and less for food production.

The industry player said there is not enough palm oil for use in both the food processing and fuel sectors.