| Crude shock: Viability of biodiesel units may come under scrutiny | |
| ANALYST`S VIEW | | Kunal Bose / Mumbai December 1, 2008, 21:07 IST | |
 In the past few years, palm oil has proved to be a growing source of biodiesel, thanks to some pioneering efforts by Malaysian and Indonesian entrepreneurs who had the backing of their governments. At the same time, non-governmental organisations are alarmed that the two countries have started sacrificing forests to make room for palm trees.
The two main provocations for the formulation of the ‘National Biofuel Policy’ in 2005 by the Malaysian government were to keep the fuel import bill under check by producing biodiesel from palm oil and to shore up the prices of the oil in times of low export demand, by channeling a portion of the surplus into biodiesel factories.
Malaysia has given approvals to more than 90 biodiesel projects linked to palm oil feedstock. Not many are up and running though. But as crude oil prices are witnessing 22-month lows due to the global economic slowdown, the operational viability of most of the sanctioned palm oil-based biodiesel projects in these two countries will come under scrutiny. Moreover, banks everywhere have become very choosy in funding the projects.
Since early 2005, the run up in palm oil prices had a link to the rising demand for crude oil. This, in turn, drove up the prices of all other vegetable oils. As long as palm oil looked like a one-way bet in tandem with crude oil, the Malaysians were not heard complaining about the coupling.
That bet has now gone into reverse. It is, therefore, not surprising that the Malaysians no longer want palm oil to take price cues from crude oil. Dorab E Mistry, director of Godrej International says, “Biodiesel has expanded the demand base for palm oil and it is now critical to palm pricing. We cannot escape from that fact.” Palm cannot help not riding the tiger (crude oil) on which it mounted in 2005.
“Palm oil is of strategic significance to us, we being such a big importer. In the season ended October 2008, India had to import 5.94 million tonnes of vegetable oils in which the share of palm oil, mostly in crude form, was as much as 4.9 million tonnes. The reason why India remained the world’s second largest importer of oils is because our domestic production of 7.135 million tonnes during 2007-08 fell short of consumption of 12.735 million tonnes by a long margin,” he says.
Mistry says India’s total production in the current season would be higher at 7.37 million tonnes and imports marginally lower at 5.815 million tonnes. “According to our per capita, consumption remains low at 11.17 kg, whereas the local use of oil will rise only to 13 million tonnes in the current season,” Mistry points out.
According to Ashok Sethia, president of Solvent Extractors Association, Kharif oilseeds were grown on a wider land base of 17.65 million hectares, but the dry spell in July and the somewhat uneven “temporal and spatial” distribution of the monsoon rains would leave their impact on the crop. The message is, “we are not going to get the benefits of higher land coverage”.
In its latest review of the kharif oilseeds crop, the Central Organisation of Oil Industry & Trade says production would remain virtually unchanged at 16.41 million tonnes with soybean topping the chart with an estimated output of 9.89 million tonnes. Groundnut production, however, has slipped to 4.52 million tonnes from 4.87 million tonnes.
The country’s edible oil output this year will depend on the rabi crop. Last year, rabi oilseeds production was down to 8.6 million tonnes from 9.52 million tonnes in 2006-07. Sethia says rabi sowing this time is progressing well and “we will harvest a bigger crop than last year”.
The weakness that the world vegetable oils market has developed is not going to go away too soon. India cannot be an exception to this global phenomenon. Significant price falls here and the urgings of SEA have led the government to put a duty of 20 per cent on imports of crude soyoil and open a small window for oils exports with a number of riders.
According to SEA Director B V Mehta, the levy of customs duty on soyoil is a good development for Malaysia and Indonesia, which have to cope with the growing inventory of palm oil. Mistry says, “In a year of rising production and falling prices, it is but natural for production to be under reported.” The Indonesian and Malaysian crude palm oil output will be a bumper 20 and 18 million tonnes, respectively.
In spite of supply running ahead of demand, hardly anyone could anticipate that CPO prices would sink from the March high of 4,486 Malaysian ringgit ($1,236) to just over 1,500 ringgit a month ago.
Mistry, however, told us that in case crude oil trades at $50 a barrel, then CPO could be down to 1,200 ringgit. In that case, the inefficient plantations would start losing money.
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