Veggie fuel tank ignites palm oil outlook

MUMBAI, India (Reuters) – Biodiesel is the new buzzword lighting up the palm oil industry.

With crude oil prices soaring, Asian palm oil and South American soy oil producers see big opportunities as countries seek vegetable oils to produce environmentally friendly biofuel.

Analysts believe biodiesel use has the potential to become the biggest component of growth in vegetable oils. It has already lifted once-depressed prices and forecasts point to a five to 10 percent increase for most oils in the new year.

“All over the world there is a switch over to vegetable oil for biodiesel, even for straight burning,” said Dorab Mistry, industry analyst and director of Godrej International Ltd..

Nadir Godrej, managing director of Godrej Industries, made the point in a lighter vein at a conference in Kuala Lumpur, Malaysia.

“I will not hazard any range, for very soon I will have to change,” he said, referring to price forecasts for palm oil. “Please do not think that I am a weasel. Just pray and say biodiesel.”

European governments are trying to promote biofuel, notably biodiesel that is derived from vegetable oil and ethanol derived from grain, sugar or biomass, as a way to cut greenhouse gas emissions from fossil fuel.

“The total biodiesel capacity coming on stream in the United States alone by the end of October 2007 will require 1.6 million tonnes of soya oil,” Mistry said. He added that rising biodiesel use will mean demand for edible oils will outstrip production by at least six million tonnes a year.

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

To sell their palm oil, Malaysia and Indonesia have for decades looked at India, until recently the world’s largest edible oil importer. But now the countries, which also must compete with South American soybean oil producers, are increasingly looking to the EU.

Palm oil is one of the world’s cheapest vegetable oils and the EU imports about 3.5 million tonnes of refined and crude palm oil every year, mainly from Malaysia and Indonesia.

But the EU’s total edible oil imports, which includes soy oil, are expected to jump eight percent next year to 8.4 million tonnes, as estimated by the influencial market newsetter Oil World.

Analysts believe palm oil producers could be the big winner because it is the cheapest of the oils and easiest to work with when transforming into fuel.

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

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

Malaysian plantation companies that could benefit from higher sales of palm oil include IOI Corp Bhd, Kuala Lumpur Kepong Bhd and Golden Hope Plantations Bhd.

IOI and privately held Kuok Oil & Grains, another Malaysian firm, have already started building refineries in Europe to process the additional palm oil expected to land in that market.

Western environmental groups have criticized the expansion of palm plantations, which they say drive out animals and jeopardize biodiversity of the jungle. Malaysia denies the charge, saying its entire palm industry is nature friendly.

“Today, the same West requires palm oil to produce biodiesel, so environmental issues are taking a back seat,” said P.R. Thakore, a vice-president with Pan-Century Edible Oils Sdn. Bhd.

Europe is short of diesel because it has underinvested in refinery production in recent decades while motorists are increasingly switching to the fuel instead of gasoline. The EU has set a non-binding target of 5.75 percent biofuel content by 2010.

Industry officials say biodiesel use will also grow in countries such as Brazil, Argentina and Indonesia, which are all net vegetable oil exporters but crude oil importers.

Derom Bangun, chair of the Indonesian Palmoil Producers Association, said Indonesia will soon move from the experimental stage in biodiesel to full fledged manufacturing.

“Many investors are seriously considering to set up biodiesel manufacturing plants in Indonesia,” Bangun said. “This is an indication of the trend for new demand for palm oil.”

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