29/09/05 MUMBAI, India (Reuters) -- Biodiesel is the new buzzword lightingup the palm oil industry.

With crude oil prices soaring, Asian palm oil and South American soyoilproducers see huge opportunities as countries seek vegetable oils toproduce environmentally friendly biofuels.

Analysts believe biodiesel usage has the potential to become the biggestcomponent of growth in vegetable oils. It has already liftedonce-depressed prices and forecasts point to a five to 10 percent increasefor most oils in the new year.

"All over the world there is a switchover to vegetable oil for biodiesel,even for straight burning," Dorab Mistry, industry analyst and director ofGodrej International Ltd, told Reuters.

A colleague of Mistry made the point in lighter vein at a conference inKuala Lumpur.

"I will not hazard any range, for very soon I will have to change," NadirGodrej, managing director of Godrej Industries Ltd, said referring toprice forecasts for palm oil.

"Please do not think that I am a weasel. Just pray and say biodiesel,"Malaysian news agency Bernama quoted him as telling the conference.

European governments are trying to promote the use of biofuel, notablybiodiesel derived from vegetable oils and ethanol that can be producedfrom grains, sugar or biomass, to cut greenhouse gas emissions from fossilfuels.

"The total biodiesel capacity coming on stream in the United States aloneby the end of October 2007 will require 1.6 million tonnes of soya oil,"said Mistry.

Mistry told a weekend conference that rising biodiesel usage will meandemand for edible oils will outstrip production by at least 6 milliontonnes a year.

Growing use

Biodiesel output by 15 EU members rose to an estimated 1.85 million tonneslast year from 1.45 million in 2003 and 1.05 million tonnes in 2002,industry associations say.

To sell their oils, Malaysia and Indonesia have for decades looked atIndia, until recently the world's largest edible oil importer. But now thecountries, which also must battle with South American soybean oilproducers, are increasingly looking to the European Union.

Palm oil is one of the world's cheapest vegetable oils and the EU importsabout 3.5 million tonnes of refined and crude palm oil every year, mainlyMalaysia and Indonesia.

But the EU's total edible oil imports -- which includes soy oils -- areexpected to jump 8 percent next year to 8.4 million tonnes, as estimatedby Oil World.

Analysts believe palm oil producers could be the big winner since it isthe cheapest of the oils and easiest to work with when transforming intofuels.

Malaysian officials said the combustion grade of palm diesel from thecountry will be on par with winter-grade methylester produced fromrapeseed, the top source of biofuel in Europe.

"But what makes the potential even greater is that palm oil is at least$200 a tonne cheaper than rapeseed oil," said Yusof Basiron, head of thegovernment-run Malaysian Palm Oil Board.

Listed Malaysian plantation companies that could benefit from higher salesof palm oil include IOI Corp Bhd , Kuala Lumpur Kepong Bhd and Golden HopePlantations Bhd .

IOI and privately-held Kuok Oil & Grains, another Malaysian firm, havealready started building refineries in Europe to process the additionalpalm oil expected to land in that market.

Western environmental groups have criticized the expansion of palmplantations, which they say drive out animals and jeopardize biodiversityof the jungle. Malaysia denies the charge, saying its entire palm industryis nature-friendly.

"Today, the same West requires palm oil to produce biodiesel, soenvironmental issues are taking a back seat," P.R. Thakore, a vicepresident with Pan-Century Edible Oils Sdn. Bhd. said.

Europe is short of diesel as it has underinvested in refinery productionin recent decades while motorists are increasingly switching to the fuelinstead of gasoline. The EU has set a non-binding target of 5.75 percentbiofuel content by 2010.

Industry officials say biodiesel usage would also grow in countries suchas Brazil, Argentina and Indonesia, which are all net vegetable oilexporters but crude oil importers.