Investment in palm oil biofuel outperforms the crude used for diesel
August 29, 2006
By Claire Leow and Saijel Kishan
Chicago - The best-performing oil investment comes from trees in Malaysia, not the deserts of Saudi Arabia.
Vegetable oils from palm trees normally used in mayonnaise and chocolate bars are being converted to diesel for Mack trucks after oil more than doubled in the past three years and governments encouraged renewable fuels.
Palm oil reached a two-year high this month and rose 17 percent in the past year, outperforming the crude oil used for most diesel. Palm oil in Kuala Lumpur might rally 20 percent in the next six months as factories making so-called biodiesel sprout, said Michael Coleman, a hedge fund manager in Singapore.
In Europe, where one of every two new cars sold burns diesel, biodiesel output would double by 2008 to meet EU targets for alternative fuels use, the International Energy Agency (IEA) forecast. Fuel from palms, soybeans and rapeseed (canola) now supplies less than 1 percent of the world's diesel.
The EU ordered that 5.75 percent of all fuel for trucks and cars come from renewable sources by 2010. Fuel production from vegetable oils worldwide was expected to triple by 2008, with most of the growth in Europe, the IEA forecast.
Supplies of diesel fuel from vegetable oils soared 80 percent in 2005, the agency said. That outpaced a 14 percent increase in production of ethanol, a fuel derived from maize and sugar, used as an alternative to petrol.
Crude oil reached a record $78.40 (R568) a barrel last month and has driven up the cost of diesel and petrol, making biofuels more competitive. Palm oil costs $507.50 a ton in Europe, less than about $680 for a ton of crude oil-derived diesel. Governments are subsidising biodiesel to diversify energy supply and reduce greenhouse gas emissions.
Vegetable oil-based diesel is made through a chemical process where the glycerine is separated from the fat or vegetable oil. The process leaves behind two products: methyl esters, the chemical name for biodiesel, and glycerine, a by-product sold for manufacturing in soaps and antifreeze.
Palm oil comes from bunches of plum-sized fruit on a tree, which becomes productive from about 30 months after planting. In Europe, biodiesel cost the equivalent of 72c to produce, according to New Energy Finance. A litre of diesel fuel sells for 81c on the wholesale market.
"As long as crude oil is above $50 a barrel, there is a momentum to biofuels that is unstoppable," said Coleman.
"The industry has got to a critical mass whereby it can weather downturns in the price of crude," said Andrew Owens, the chief executive of biofuel supplier Greenergy International.
Palm oil is not just for trucks and cars. A UK unit of RWE, Europe's third-largest utility, might convert a power plant to burn palm oil after it evaluated the costs and technical issues, said spokesperson Leon Flexman.
Biox Group, a biofuel producer based in the Netherlands, will have the first of four power plants running near Vlissingen, the country's third-biggest sea port, early next year.
"Now, palm oil is the cheapest and most efficient of vegetable oils," said group finance director Edgare Kerkwijk. "We need 100 000 tons a year."
Malaysia and Indonesia produce 85 percent of the world's palm oil, the most consumed vegetable oil, while the US, Brazil and Argentina grow 80 percent of the soybeans.
In Europe, palm oil is gaining market share, though most plant fuel comes from local harvests of rapeseed.
Fuel demand is adding to already booming consumption of vegetable oil for food and chemicals. China would import 8.5 million tons of vegetable oils this year, of which 64 percent would be palm oil, said Standard Chartered Bank. Food use of palm oil would rise 4.5 percent this year and industrial use 9 percent.
The growing use of palm oil as fuel may threaten virgin rain forest in southeast Asia and quicken deforestation, raising the likelihood of legal challenges from environmentalists. "The biggest challenge to palm oil is sustainability," said Domenic Carratu, the managing director of commodities at Rabobank Groep in London. "Biodiesel aims to be environmentally friendly, but this would not be the case if the feedstock were only grown at the expense of virgin rain forest."
Vegetable oils would meet some of the world's energy demand and might help curb growth in consumption of crude oil, said energy analysts, but they would not solve a lack of refining capacity. - Bloomberg
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