07/10/05 (FT.com) - Malaysia may become the first Asian country to requirethe replacement of diesel fuel with biofuel for vehicles and machinery, inan effort to cut costly fuel subsidies and boost the local palm oilindustry.

Malaysia's ministry of plantation industries and commodities wants toinclude the mandatory sale of biodiesel in a proposed biofuel billexpected to be submitted for cabinet approval this month, a ministryofficial told the Financial Times.

Biodiesel, a mixture of 5 per cent palm oil and 95 per cent diesel fuel,would be sold from 2007 if the law is approved. Malaysia is the world'sleading producer of palm oil.

The move is in response to increased government spending on fuelsubsidies, including diesel. Higher oil prices are expected to raisespending on fuel subsidies by 34 per cent to M$16bn (US$4.3bn) this year.Officials estimate the use of biodiesel could reduce demand for diesel bymore than 10 per cent.

Malaysia is planning to build three plants to produce 180,000 tonnes ofbiodiesel for export within the next year.

Malaysia's biodiesel plants will be operated in a joint venture betweenthe Malaysian Palm Oil Board and several local palm oil plantationcompanies.

Global demand for biofuels was 2.5m tonnes last year and is expanding by25 per cent a year, with Malaysia aiming to gain a 10 per cent marketshare.

JP Morgan estimates the price of palm oil will increase to M$1,610 a tonneby 2007, although that is still less than diesel, which is now priced atabout M$2,000 a tonne.