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Biofuel Appeal Stokes Bullish Palm Price Outlook

Date: 09-Mar-11
Country: MALAYSIA
Author: Niki Koswanage and Michael Taylor

Malaysian plans to subsidize biofuel and the launch of the world's biggest biodiesel plant in Singapore promise to give a fillip to the renewable fuel industry worldwide, planters and traders in the Malaysian capital said on Tuesday.

The moves come as key feedstock palm oil soars to multi-year highs, riding crude oil prices driven higher by fears of spreading unrest in the Middle East that has cut Libyan exports.

Benchmark palm oil prices have gained around 30 percent during the last 12 months, with fund buying and speculative trading helping support prices. The benchmark contract on Bursa Malaysia Derivatives hit a two-week high at 3,700 Malaysian ringgit ($1,220) a ton on Monday.

The United Nations has cited the use of biofuels -- seen as a way to diversify the energy mix and ease reliance on costly fossil fuels -- as one reason why food prices are growing, threatening long-term food security.

Rising investor interest in Asia in farm commodities has also drawn CME Group Inc, parent of the Chicago Board of Trade, to forge ties with the Indonesia Commodity & Derivative Exchange (ICDX), allowing investors access to CME's agriculture products. But the CME dismissed concerns that speculative trades had driven up food prices.

"A lot of people are looking for scapegoats, but the markets are demand-driven; we are looking at increased food demand, commodities getting used as fuel, demand from the Asian region -- especially India and China," said Charles Carey, vice chairman of CME Group. "A lot of people talk about speculators. They provide liquidity. The rise in food prices is truly demand-driven," he said at the Palm and Lauric Oils Conference & Exhibition Price Outlook 2011 in the Malaysian capital.

The regional futures market for edible oils has already experienced strong growth, with the CME, which has a more formalized tie-up with Bursa Malaysia, seeing trade of palm oil linked to the Globex trading platform, along with soyoil, making up 67 percent of the world edible oil market.

A Western trader also underscored the need for ample liquidity to help moderate the extremes of highs and lows in a futures market amid growing demand for biofuel. "We've had record crops in many of these foods, so imagine what it'd be like if there was a major supply issue," he said.

"About 40 percent of corn produced in the U.S., goes into biofuels. If all the vegetable oils used in biofuels went toward feeding people instead, there would be no food inflation." But commodity speculation fears have prompted a crackdown by China, which a top Chinese official at the conference said had made trade in local futures more stable than international markets, and signaled initial success in Beijing's campaign to rein in food inflation. During the exercise, China's three commodity exchanges -- Shanghai, Dalian and Zhengzhou -- tightened trading rules to limit speculation.

"From the viewpoint of Dalian Commodity Exchange operations, market moves and prices have reacted to government policy," exchange vice president Li Jun, told Reuters. "Prices are fluctuating in a smaller range."

MALAYSIA REVITALISING BIODIESEL SECTOR

Forecasts for rising palm oil production have prompted No. 2 producer Malaysia to subsidize palm-based biofuel at the pump to keep its price on par with petroleum diesel, two industry sources told Reuters, possibly reviving the country's biodiesel industry.

"The government has come to understand that they need to support this high-value product," said a source familiar with the plan. In 2006-2007, Malaysia spent about 2.2 billion ringgit to build biodiesel plants to tap growing demand for alternative fuels but a slump in crude oil due to the financial crisis, and scrutiny by green groups, left the plants idle.

The move to subsidize palm-based biofuel will remove some 100,000 tons of palm oil from the market by end-2011, the sources said, with Malaysian palm oil production is forecast to rise to 17.6 million tons this year.

A key agronomist also projected rising palm oil outputfrom the world's top two producers. Combined output in Indonesia and Malaysia will rise to 40.7 million tons this year and rise to 43.7 million in 2012 as erratic weather patterns fade, said Ling Ah Hong, a director of plantation firm Ganling.

"With good rainfall the last residual El Nino effect might end in the first half of 2011, and supply will resume in the second half of this year," Ling told the conference. However, rising demand, especially coupled with the new push toward biofuel use as Libyan unrest threatens crude oil supplies, will keep Malaysian palm oil stocks tight from February to April, feeding fears of global food inflation.

One analyst said prices could come off their highs in the next few months as investors started to cash in on high prices and harvests started in Malaysia and top producer Indonesia.

"Coming back down, we could see palm in a 2,500- to 3,000-ringgit range toward the back end of the year," Chris De Lavigne, vice president of Industrial Practices at Frost & Sullivan, told Reuters. "More supply coming in the market will also have an impact on the market.

"It could be a sustained fall, before it stabilizes and starts to pick up again.

Malaysian Palm Oil Board (MPOB) Chairman Shahrir Samad said stocks in February, March and April are set to be about 1.3 million tons to 1.4 million, down by up to 8.5 percent from January. Tighter stocks could speed a rise in the U.N. Food and Agriculture Organization's Oils/Fats Price Index, which gained marginally to 279 points in February. A big source of future feedstock demand will be Finnish Neste Oil's $768 million, 800,000 ton-per-year biodiesel plant in neighboring Singapore, which started operations in November but may face negative biodiesel margins this year as supply outstrips demand due to high costs.

At the plant's opening, Neste chief executive Matti Lievonen said he expected European biodiesel demand to grow to 20 million tons by 2020, from 12 million now. Such projections imply the growing use of grains and oilseeds to produce energy, and combined with extreme weather and policies to protect domestic markets have triggered great concern over prices and food security, the UN's Food and Agriculture Organization (FAO) said this week. Some industry players played down the role of biofuels in driving up edible oil prices.

"Food demand has really gone up and there has been underinvestment in the agriculture sector, so supply cannot grow as fast," said James McKay of Starsupply Renewables, the world's largest biofuels brokerage, adding that the biodiesel sector made up just 7 percent of total global edible oil consumption. "It is growing but not that much," the broker said.

(Editing by Clarence Fernandez)

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