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16 Apr 2007 04:16 GMT


=DJ INTERVIEW: Palm Oil Industry's Biodiesel Targets Unrealistic

By Benjamin Low
Of DOW JONES NEWSWIRES

KUALA LUMPUR (Dow Jones)--The global palm oil industry will be headed for disappointment if it is expecting 2007 to be a year of substantial biodiesel exports to Europe, an Italian biodiesel producer said.

Michele Falciola, president of Mythen SpA, said palm oil is likely to continue playing only a small part in the European biodiesel market for now, as the region is already struggling with overcapacity and still views the quality of fuels made from foreign oils with much skepticism.

All the optimistic talk that is been circulating in the palm oil market about millions of tons being used for biodiesel, that has in turn lifted prices to eight-year highs, may, therefore, be misguided, he said.

"The overcapacity of biodiesel in Europe is becoming pathological," Falciola said in an interview.

"Malaysian and Indonesian manufacturers that have expressed their desire to export most of their (palm oil-based) biodiesel to Europe, therefore, appear almost naive."

Malaysia and Indonesia are the two biggest palm oil producers in the world.

Europe's limited scope for biodiesel imports isn't the only reason the anticipated surge in the use of palm oil for fuel may not materialize, Falciola said.

Palm oil, at today's prices, is around 40%-50% higher than crude oil, and is no longer competitive as a feedstock for biodiesel, he said.

The palm oil market appears to have run well ahead of fundamentals, overestimating the demand from the energy sector. "A drop (in prices) will be as dramatic as it is overdue," Falciola said.

The benchmark crude palm oil futures contract on the Bursa Malaysia Derivatives ended at MYR2,200 ($637) a metric ton April 13.


European Demand May Shrink

Milan-based Mythen has a 200,000-ton-a-year capacity plant that has been producing biodiesel from palm oil since 2002.

Europe is by far the world's biggest user of biodiesel. Consumption reached 4.15 million tons in 2006, with Germany accounting for about two-thirds of the total volume.

Years of uninterrupted growth in consumption in the region, however, could come to halt in 2007 after a dramatic change in Germany's policies on biodiesel.

In Germany, biodiesel was exempt from excise duties until this year, when the government started imposing the same taxes on biodiesel as it does on petroleum diesel.

Oil retailers have responded to the new law by switching from producing the popular 100% biodiesel product to a 5% biodiesel and 95% diesel blend.

The drop in the use of biodiesel in Germany's fuel mix could cut Europe's total biodiesel consumption in 2007 by more than 10% to 3.6 million tons, Falciola said.

"Considering the enormous importance of the German biodiesel market, it is clear that a slump in this market will have a decisive effect on the world market," he said.

Any decline in biodiesel consumption in Europe couldn't come at a worse time as large new capacities planned earlier are due to come on-stream this year.

By the end of 2007, production capacity in Europe is expected to reach 5.9 million tons, 60% higher than actual demand.


Margins Dissolving Like "Snow"

Even if Europe had room to consume more biodiesel in 2007, it would be no guarantee of a rapid increase in palm oil's market share, Falciola said.

Falciola's Mythen is one of the few manufacturers in the region to make methyl ester, commonly known as biodiesel, from palm oil.

Rapeseed oil continues to be the dominant feedstock in Europe, where long-held suspicions about the quality of palm oil persist, Falciola said.

"The current impression of the market is that palm methyl ester is a second-rate biodiesel, which is not true," he said.

Oil companies remain wary of using palm oil, though it is cheaper than rapeseed oil, in their fuel blends for fear of a backlash from consumers.

"Consequently, it would take several years for PME to secure a market with a certain degree of importance in Europe, regardless of the price factor," Falciola said.

Amid all the talk about biodiesel demand, Falciola said, the palm oil market may have run ahead of itself there may not even be much supply of palm methyl esters in the first place.

The ongoing rally in palm oil prices may put an end to the palm methyl ester industry even before it can take off, he said.

"Margins have dissolved like snow in the sun," Falciola said.

Falciola joins a host of other biodiesel manufacturers who have warned that palm oil's future as a biodiesel feedstock may be in doubt if prices stay high.

Australia's Mission Biofuels and South Korea's Eco Solutions are among manufacturers that are already turning to jatropha, a cheaper inedible oil, as an alternative to palm oil.


-By Benjamin Low, Dow Jones Newswires; 603 2692 5254; [email protected]

-Edited by Ryan Woo


(END) Dow Jones Newswires

April 16, 2007 00:16 ET (04:16 GMT)