20/10/05 KUALA LUMPUR (Dow Jones) - Recent optimism of surging demandfor palm oil as a fuel substitute in Europe may be overdone as there arestill major obstacles to the use of the commodity in this emerging sector,a European bio-fuels industry official said.

As the cheapest edible oil in the world, palm oil does have a brightfuture as an alternative to conventional mineral oil.

But for now it is premature to expect huge volumes to be consumed - atleast not for another year or so, said Ard van de Kreeke, managingdirector of Dutch bio-fuels trading company Biox Group BV.

"Yes, there is a future (for palm oil). But it's not the sort of thingwhich is going to happen the next month or next year. It's a long-termthing," he said in an interview.

"It's a market that is slowly developing, but, that is, at the moment,highly overestimated," he said.

Rising crude oil prices in recent months have spurred intense speculationin the palm oil industry of a boom in demand for palm oil for burningpurposes, particularly from major bio-fuel users such as Europe.

Those hopes triggered a run-up in benchmark Malaysian crude palm oilfutures prices which reached six-month highs in September, though themarket has since relinquished some of its gains.

Van de Kreeke said the rally is unwarranted as the market is expecting toomuch, too soon. In reality, the current consumption scenario for palm oilfuel in Europe isn't all that dramatic.

The bulk of the palm oil that is being used is in the form of palm fattyacid distillate as bio-mass for power plants, as opposed to bio-diesel formotor vehicles, where indigenous rapeseed oil has a virtual monopoly.

"Today, what you see for palm oil is that there is an existing market (forpalm bio-mass). People may be talking about millions of tons of palm oil,but the actual total which went into energy is 500,000 tons (a year)," Vande Kreeke said.

"That market (emerged) a year ago and volume is now stable (but) notgrowing at all. And to be honest, in the last two months, that market hasbeen very much under pressure," he added.

Environment Concerns Hurting Palm Oil

Biox is one of Europe's biggest suppliers of bio-fuels to the energyindustry.

To be sure, the company believes in palm oil's long-term potential asdemonstrated by the company's aggressive expansion plans, which includethe building of power plants using palm oil.

However, in the short term, there are crucial unresolved issues inhibitingpalm oil's market penetration, Van de Kreeke said.

Within the bio-mass sector, growing criticism about the palm oilindustry's environmental-related practices is one of the key stumblingblocks.

The pressure on the palm oil bio-mass market witnessed in the last twomonths has been partly because of such concerns.

"The whole perception on palm oil has been very negative the last coupleof months because all the NGOs are focussing on the sustainability issue,"he said.

Environment and conservation groups, especially those in Europe and theU.S., have frequently slammed palm oil producers Malaysia and Indonesiafor destroying rain-forests and wildlife to clear land for plantations.

The criticisms have intensified this year just as palm oil is set toovertake other oils such as soy oil to be the world's main vegetable oilin terms of production.

Van de Kreeke said the palm oil industry needs to answer thesustainability questions before it can make significant inroads into theEuropean energy market.

Uncertainty over subsidies is also restricting growth of palm oil in thebio-mass sector.

Van de Kreeke said the use of vegetable oils in power plants in Europe ishighly dependent on the extent of subsidies given by governments topromote renewable, or "green" energy sources.

"There is a big gap between what is feasible with and without subsidies,"he said, adding that clear, long-term subsidy schemes were still not inplace in many European countries.

If anything, the most recent development on subsidies has been ratherominous.

The Dutch government unveiled in early October plans to cut subsidies forbio-mass energy projects, saying such ventures were now profitable and nolonger needed government support.

That is potentially bad news for palm oil as the Netherlands accounts forabout 70%-to-80% of the palm oil bio-mass currently being used in Europe.

"That means 70%-to-80% of the existing market for palm oil is coming underpressure," he said.

Palm Diesel Not Feasible Without Subsidies

As for fuel used in the transport sector, more commonly known asbio-diesel, sustainability and subsidies are also the main factorsimpeding palm oil's breakthrough.

"Today, bio-diesel from palm oil is not feasible. Bio-diesel is very muchfocussed on rapeseed oil, which is subsidized by the government," Van deKreeke said.

"We would definitely like to build a palm oil bio-diesel plant if themarket is there. But today it is difficult," he said.

Market talk of millions of tons of palm oil going toward bio-diesel use,therefore, appears far-fetched for now, as it is difficult to foreseeEuropean governments supporting a product that is in direct competitionwith indigenous oils, he noted.

His comments mirror those made recently by other European industryofficials.

During a recent conference in Malaysia, Raffaello Garofalo, secretarygeneral of the European Biodiesel Board, said environmental concerns andagriculture policies are likely to limit room for palm oil use in theEuropean bio-diesel market.

Van de Kreeke added that the success of palm oil diesel is also dependenton mineral oil prices staying at high levels.

He said for palm oil diesel to be economically viable, without subsidies,crude oil needs to stay above $60 a barrel.

Biox Has Long-Term Expansion Plans

Still, palm oil's price advantage over other oils makes it an attractiveproposition for bio-fuels for the longer-term once subsidy andsustainability issues are resolved.

"Palm oil is a very good bio-mass because the cost price per ton is verylow if you compare to soy, rapeseed and other vegetable oils," Van deKreeke said.

Biox's confidence in palm oil's prospects has prompted the company toembark on a project to build three 50-megawatt power plants in theNetherlands, which when ready in 2007, will each use up to 100,000 tons ofpalm oil a year.

The company has already signed contracts with Malaysian producers to fixits palm oil supply for 10 years for the plants. Subsidies and the sellingprice of the electricity produced have also been fixed for 10 years, Vande Kreeke said.

As part of preparations to handle larger volumes, Biox has also bought atank terminal in Rotterdam and is building another one in Vlissingen,where the company is headquartered.

Biox is set to officially launch its Malaysian office in November, and inthe longer term, has plans to expand upstream into plantations as part ofmeasures to ensure consistent supply.