Malaysia biodiesel sector faces uncertain future

By Naveen Thukral

SINGAPORE (Reuters) - Malaysia's biodiesel industry will not expand as fast as first hoped and faces a difficult future with rising feedstock costs, slumping oil prices and uncertain government support, a top industry analyst said.

Malaysia, the world's top palm oil producer, has taken the lead in the development of the Asian biofuel industry but the players setting up units face shrinking margins due to surging vegetable oil prices and declining petroleum oil costs, against which biofuels compete.

"Most of the players will review their position because the entire business model has changed," M.R. Chandran, an independent industry analyst and a former head of the Malaysian Palm Oil Association, told Reuters.

"The banks who are going to give loans are going to ask, what is your business model today with feedstock prices at this level."

Asian interest in vegetable oil-based biodiesel started growing in 2005 when the cost of palm oil was cheaper than crude petroleum and Europe made plans to promote green fuels.

But now the situation has completely reversed.

Crude palm oil, the main raw material for biodiesel, now costs $556 a ton, after gaining 40 percent in 2006. Crude petroleum is quoted around $373 a ton, down more than 32 percent from the record high of $550.9 in July last year.

Malaysia has approved 75 biodiesel manufacturing projects which would annually consume around 8 million tonnes of palm oil a year and officials say the country is expected to produce one million tonnes of biodiesel in 2007.  Continued...