Bio-diesel Boom may cause long term Problems

By Benjamin Low

Of DOW JONES NEWSWIRES

KUALA LUMPUR (Dow Jones)--Growing global interest in biodiesel may be a boon for palm oil, but it also raises questions about the social implications of burning what is an essential, and the world''s most affordable edible oil, a Malaysian industry official has said.

In the long-run, the biodiesel industry may, therefore, not be quite as large as many are expecting it to be, said P.N. Agarwal, group managing director of Premium Nutrients Bhd, a palm oil refiner and specialty fats maker.

"I feel biodiesel is not very sustainable in the long-term. It''s going to create a competition for palm oil between (users in) the edible and non-edible sectors at some point," Agarwal said in a recent interview.

"It could reach a stage where governments may have to stop all the biodiesel projects because we need to feed the people," he added.

A surge in oil prices to record highs has sparked intense worldwide interest in alternative fuels such as ethanol and biodiesel.

Like rivals soyoil and rapeseed oil, palm oil has also been found to be a suitable diesel substitute.

As a result, corporate investments in the biodiesel sector in Malaysia, the world''s biggest palm oil producer, has surged in recent years.

This year alone, the Malaysian government has already approved close to two dozen biodiesel projects.

While the emergence of a new market for palm oil is positive for the commodity, the industry may need to tone down its enthusiasm and consider the costs, Agarwal said.

As it is, the existing annual vegetable oil output of around 140 million metric tons is barely enough to meet food requirements, he said.

If the biodiesel sector is allowed to expand without limits, a day may come when palm oil prices may rise beyond the reach of consumers who need it for food, Agarwal said.

"Vegetable oil is an essential commodity. If the price of oil goes skyrocketing, poor people may not be able to afford it," he said. "So, amid all this euphoria about biodiesel, people need to look at it and see how we can protect the edible oils sector and ensure that people are not being (burdened) by very, very high prices."

Agarwal said it wouldn''t make sense for governments to promote biodiesel by offering incentives and subsidies, if such a move were to result in edible oil prices soaring.

Then, governments would also have to subsidize the production of cooking oil to keep it at affordable levels for consumers.

"Ultimately, it will force governments all over the world to take a rational policy decision. And when a compromise is required, the edible sector will always win," Agarwal said.

This however, is easier said than done, as producing and consuming countries often have different priorities and large producers such as Malaysia may find it more profitable to subsidize the small domestic consumption than let go off the benefits of increased demand for one of its key export items.

Moreover, large consuming countries such as India and China don''t have much of a moral high ground to argue this case as they were happy beneficiaries when palm oil prices remained low for several years, forcing producers to start thinking about biofuels even before global petroleum prices rose.

Trans-Fat Fears Boost Palm Oil Sales

Meanwhile, the use of palm oil for consumption as cooking oil is expected to continue rising this year and in the coming years, Agarwal said.

Emerging economies like China and India still have plenty of room to catch up with their more developed counterparts in per capita edible oil consumption.

Similarly, in Eastern European countries, the per capita consumption levels are only about half of the 30 kilograms a year in western European countries.

Palm oil demand in that region is expected to register the fastest growth in the near future as they reap the benefits of high prices for major commodities such as crude oil and gold.

Palm oil sales are also on the rise as the commodity is benefiting from a global shift away from partially hydrogenated soyoil.

The hydrogenation of soyoil, a process of adding hydrogen to make the oil more solid and stable, creates trans-fats, which have recently been found to be a bad for the heart.

Palm oil is naturally semi-solid and requires no hydrogenation.

"People are looking more and more for trans-fat free oils and this is having a good impact on our company," Agarwal said.

"This (demand) is coming from the more developed countries for now, but we can see that other countries are also starting to look at it and awareness is starting to be there," he added.

Export Duties Hurting Industry

Meanwhile, Agarwal said he was concerned about the lack of a policy response in Malaysia to the increasing competition from Indonesia.

Malaysia has long been the top CPO producer, but many analysts are predicting Indonesia may take that position as early as this year.

Malaysia is fast losing its competitiveness because it is still maintaining high duties on CPO exports compared to Indonesia, which has virtually no restrictions, Agarwal said.

Export duties on CPO are calculated on a graduated basis depending on the selling price of the commodity, with the highest rate set at 30%.

"Side-by-side, you have two countries producing the same amount of CPO, but one has no duties and the other has. So, one country is knowingly diverting all its buyers to its neighbor," he said.

The government''s past rationale for imposing duties on CPO exports to promote domestic refining may no longer be relevant today, Agarwal said.

"The trend now is that the consuming markers themselves want to import CPO because they want to develop their own value-added industry. This is happening in India, Pakistan, China and Europe," he said.

The Malaysian government has relaxed its restrictions by awarding quotas to some large plantation companies to export a limited amount of CPO.

However, that isn''t enough as smaller producers still have little access to overseas markets, he said.

Furthermore, since room for direct CPO exports are limited, many plantation companies have resorted to setting up their own refineries and selling refined oils at lower prices.

This has hurt independent refiners, Agarwal said, citing the closure of some refineries in recent years and the sale of major refiner the Pan-Century group as examples.