16/6/05 KUALA LUMPUR (Dow Jones)--Malaysia should emulate Europe insetting up a program to manufacture and use biodiesel, a prominentofficial in the palm oil industry said.

Malaysia, the world's top producer of palm oil, is considering how topower vehicles with the edible oil - a development that would underscorepalm oil's gradual recognition as a viable energy source, suggested SabriAhmad, group chief executive of Golden Hope Plantations Bhd, one of thecountry's biggest producers.

The European Union is at the forefront of using agricultural products,particularly vegetable oils, as alternative fuels. European power plantsburn various forms of palm oil, including crude palm oil, palm stearin andpalm fatty acid distillates, for electricity generation.

While palm oil's popularity as a biofuel is on the rise, Sabri notes thatits penetration as a biodiesel - suitable for using in motor vehicleengine - is small even in Europe.

E.U. biodiesel output - 1.9 million tons last year, up from 1.4 million ayear earlier - is derived almost entirely from rapeseed oil, as governmentsubsidies and incentives to promote biodiesel have been exclusive toEurope's indigenous oil.

Drawing on its strength as the largest producer of palm oil, Malaysia isexpected soon to have its own biodiesel program based on that commodity,said Sabri, who is also chairman of producer lobby group the MalaysianPalm Oil Association.

"The proven model to follow is rapeseed oil in Europe, where biodiesel hassupported rapeseed prices at a very high level. So, the farmers there havebenefited and at the same time, they have a sustainable fuel," Sabri said.

"If Europe is using rapeseed oil at a price which is much higher than palmoil, surely we in the country can use palm oil to start having asustainable source of energy," he said.

Rapeseed oil in Europe is quoted by traders at around $630/ton, about$200/ton more expensive than palm oil.

Malaysian industry officials have been working with the government to comeup with a plan for biodiesel production and usage in the country.

Plantation Industries and Commodities Minister Peter Chin has been citedin local media as saying the plan will be discussed in the cabinet incoming weeks.

Details are unavailable, but there have been suggestions in the industryof blending palm oil-based biodiesel with petroleum diesel at a ratio ofup to 5%.

"The technology is there. The main issue for the industry is how thegovernment can support the private sector to start up this project (and)what incentives will be offered," Sabri said.

Talk of biodiesel has so far had little impact on palm oil prices, asmarket players are skeptical, saying that although palm oil is the world'scheapest edible oil, current prices are still too high to be used asbiodiesel unless subsidized by the government.

Sabri counters by saying biodiesel would be no different from regulardiesel, which is also heavily subsidized by the Malaysian government.

"We're fortunate in Malaysia that our palm oil is very cost efficient," henotes.

Golden Hope is taking the lead in the industry's efforts to venture intobiodiesel. It plans to work with the Malaysian Palm Oil Board to build thecountry's first biodiesel plant. It also recently announced a tie-up withDutch biofuels group Biox Group BV to explore potential biodieselproduction for the European market.

Meanwhile, though biodiesel is tipped to be a major driver of palm oilconsumption in the long term, demand in traditional food industries stillhas plenty of room for growth, Sabri said, singling out North Africa andEastern Europe as promising markets.

Also, Russia was a major importer of palm oil in the days of the SovietUnion, taking in about 1.0 million tons a year at its peak. But tradeplunged with the breakup of the Communist regime and never recovered.

"Today, they are taking only about 100,000 tons (a year). We should goback to doing at least 500,000 tons," Sabri said.

Even in traditional key markets like China and India, demand is far fromsaturated, as most of the palm oil shipped to those countries goes mainlyto industrial users as a frying oil for chips and noodles.

"We haven't tapped the retail market yet," Sabri said, referring toproducts such as bottled cooking oil.

"What we have to do in the industry now is to go to the consumer andconvince them that palm oil is good."

Sabri said the industry needs to move beyond the bulk commodity businessto reach more consumers. A lack of marketing and distribution channelsmeans buyers wanting to purchase only small quantities of palm oil areoften left frustrated.

"There's still a lot of room for improvement in terms of organizingdistribution centers," he said.