27/11/2008 (The Edge Daily), Kuala Lumpur - The proposal of oil palm planters for the government to burn excess palm oil to generate electricity, after initial measures failed to halt the price slump, is unlikely to be implemented, said OSK Research.

“Given the measures already introduced, which are to sustainably increase domestic consumption and reduce palm oil output, we do not think the government will agree to burning 0.5 million tonnes of palm oil (representing 2.8% of Malaysia’s estimated output next year) to generate electricity.

“To agree to this will mean cancelling the 5% biodiesel blend (programme) as there will not be enough palm oil to burn for both transportation and power generation,” the research house said yesterday.

“Moreover, the mandatory biodiesel blend is a long-term plan worked out between Malaysia and Indonesia, hence it is unlikely that the government will make changes to a pre-agreed plan.”

Moreover, it said Malaysia’s commodity and plantation minister had already said that any measure taken would be made together with Indonesia. “To attempt to implement the recommended measure will mean going back to the drawing board, which could possibly take even longer.”

OSK Research said while it believed the biodiesel programme would progress as planned, the impact on reducing palm oil inventory would be muted next year, especially in the first half; hence its low average crude palm oil (CPO) price assumption of RM1,650 per tonne.

“We maintain our view that the measure will start to materially reduce inventory in 2010, whereby we expect average CPO price to rise to RM1,900 per tonne,” it said.

OSK Research said the generating power proposal would be a faster way of reducing the country’s high inventory level, which stands at above two million tonnes currently.

It said the government’s two measures of implementing a countrywide mandatory biodiesel blend in 2010 and replanting of 200,00 hectares of oil palm area, would take a longer time to impact on inventory.

“Hence, if the government agrees to burn off excess palm oil for power generation, the price impact on palm oil would be immediate and significant, bearing in mind that palm oil’s discount to soybean oil is still very high at US$312 per tonne currently,” it said.

Remaining cautious on the plantation sector, HwangDBS Vickers Research said while the planters’ proposal was a better idea than the biodiesel programme, it was sceptical that the measure would have significant impact on palm oil prices, given the significant slowdown in trade flows as a result of the global tightening of credit.

The Malaysian Palm Oil Association had asked the government to use the RM200 million allocated for the biodiesel scheme for the purpose.

The planters also asked the government to reduce the price of fertiliser, which accounts for a significant part of production cost (50% for IOI Corporation Bhd).

“When calculated on per unit basis, the government allocation of RM200 million would amount to RM400 per tonne. We believe this means that the power companies would have to purchase the CPO at market prices and collect the RM400 to cover the difference in cost compared to diesel fuel, having taken into account the energy efficiency per tonne of CPO,” HwangDBS Vickers Research said.