Published December 11, 2008

Malaysian government pushes for palm oil biofuel

It will sell palm biodiesel at pumps, lobby IPPs to burn palm oil as fuel

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(KUALA LUMPUR) Malaysia yesterday said that it would aim to convince independent power producers (IPPs) to boost the use of palm oil as a fuel, but industry observers remained sceptical because of the government's overly high subsidies to support the sector.

The world's second- largest palm producer said that it will sell palm biodiesel at domestic pumps in 2010, as well as lure IPPs to burn palm oil as biodiesel - measures aimed at mopping up excess stocks of the vegetable oil.

The announcement comes as palm oil prices have tumbled nearly two-thirds from a peak of RM4,486 (S$1,869) on a mix of surging stocks and funds fleeing commodity plays while new estates find it difficult to stay afloat.

'By January 2010, palm biodiesel will be available at all the pumps nationwide, of course within reasonable delivery distance,' Plantation Industries and Commodities Minister Peter Chin told reporters, adding that the government was in talks with IPPs to burn the tropical oil as a fuel.

He declined to say how much palm oil will be channelled as biodiesel to the IPPs, which include YTL Power, Sime Darby, Tanjong plc and MRCB.

If biofuels are successfully implemented in the transport and industrial sectors, at least half a million tonnes of crude palm oil will be removed from the market in 2009, Mr Chin said.

Palm oil production in Malaysia for next year will stand at 18 million tonnes, the government has forecast, suggesting that less than 3 per cent of it will be removed, barely making a dent.

Malaysia has already put in place mandates for biodiesel use in government vehicles and will give aid to the industry to replant as part of the package of measures to boost demand for crude palm oil and curtail oversupply.

Industry watchers welcomed the measures but said that the government's reliance on a RM400 million fund drawn from taxing palm planters may not be enough to subsidise biodiesel for transport and power generation.

Of the amount, RM200 million was already earmarked for biodiesel and the rest for replanting.

'It's all a matter of cost,' said S Paramalingam, executive director of local brokerage Pelindung Bestari Sdn Bhd.

'The government has been talking about these measures for the longest time but with crude oil prices falling at a faster rate than palm oil, the subsidies may be much higher and there will be a reluctance to follow through.'

Now, palm biofuel would have to compete with cheap domestic petrol diesel, one of the lowest priced in Asia as the government still pays out subsidies from oil and gas export revenues.

In 2006, Malaysia took the lead in developing Asia's biodiesel industry and granted licences to more than 90 firms to set up plants with grandiose visions of introducing palm biodiesel into the domestic fuel market.

But until recently, sky-high prices and a preference to divert palm oil into the more lucrative food industry saw the government dragging its feet. -- Reuters