11/12/2007 (Bloomberg) - Malaysia, the second-biggest palm oil producer, may revoke some licenses to produce biofuel from the commodity as the surging price of the raw material makes the fuel too expensive to make, a minister said.

One of Malaysia's four biofuel plants may close and a government proposal to force vehicles and ships to use a mixture of diesel and palm oil needs further consideration, said Peter Chin Fah Kui, minister of plantation industries and commodities.

Surging crude oil prices have stoked government and investor interest in alternative fuels, including blends made from palm oil, sugar and corn. Palm oil futures in Malaysia, the global benchmark, touched a record last month, eroding margins for biofuel makers.

``It does not augur well for the industry,'' Chin told reporters in Kuala Lumpur today. ``The four plants are really operating way below capacity because of the feedstock price. For those that have been given licenses and have not done anything at all, we may instigate some sort of action.''

Malaysia's National Biofuel Policy of 2006 proposes laws to enforce the use of a biofuel made from diesel mixed with 5 percent palm oil. A study of the policy may address the extent to which palm oil is used in the mix, Chin said.

Biofuel Permits
Malaysia has issued 91 permits to produce biofuel, Chin said. A government committee will meet early next year to decide what action to take, if any, against companies that haven't started production, he said.

Palm oil futures in Kuala Lumpur, which rose as high as 3,068 ringgit ($926) a ton on Nov. 26., have gained 55 percent over the past 12 months. The contract traded at 2,890 ringgit a ton at 12:30 p.m. on the Malaysia Derivatives Exchange.

Chin didn't say if the four existing plants are state-owned or run by private companies. The remarks today echo comments from March, when the minister said licenses for biofuel plants in the Southeast Asian nation may be revoked as so few were operational.

About 90 percent of global palm oil supply is grown in Malaysia and neighboring Indonesia, the biggest producer. The palm's fruit is crushed to produce an oil, which may be further refined to produce methyl esters for adding to fossil fuels.

Thailand said last month that Southeast Asia's second-largest economy may expand oil-palm planting by more than a third to increase output and help trim import bills inflated by costlier crude oil, according to a statement from the ministry of energy.

Crude oil futures on the New York Mercantile Exchange touched a record $99.29 a barrel on Nov. 21. The contract for delivery in January traded at $88.31 at 2:27 p.m. Kuala Lumpur time.

The European Union may struggle to meet its quota for using biodiesel without greater reliance on palm oil, Chin said today.

Palm oil is also used in foods, as a cooking medium and to make soaps and detergents. China and India, the world's two most populous nations, are the two biggest palm oil importers.