Palm oil favoured for biodiesel

As an economic raw material for biodiesel production, palm oil may score over others including rapeseed oil and soybean oil, according to a Rabobank report.

Studying the ongoing production practices in Germany, one of the largest biodiesel producing countries in the world, the report said that the total cost of processing palm oil at petrol kiosks stands between $803 and $823 a tonne compared with rapeseed oil ($1,041-1,061 a tonne) and soybean oil ($903-923 a tonne). The current retail price of biodiesel is $1,332 a tonne.

The biodiesel industry is gradually grabbing the potential price benefits of palm oil over other feedstocks, which is evident from the price movement of palm oil.

Since 2006, the commodity prices of the three major vegetable oils have been on a bullish run, touching historical highs. Palm oil saw the most dramatic increase over the 16-month period between January 2006 and April 2007.

From January to May 2007, the average price of palm oil was $634 a tonne, an increase of over $150 a tonne from the average prices in 2006.

Noticeably, the gap in prices of palm oil, rapeseed and soybean oil has narrowed significantly, raising the question of palm oil's long-term competitive advantage as a cheaper feedstock for biodiesel production.

Part of the bullishness in prices is linked to the demand-supply imbalance "" both real and speculative "" of the major vegetable oils. Rising food demand and market sentiments, influenced by the speculative demand in biodiesel and its potential, are also driving up the prices of vegetable oils, the report said.

Meanwhile, a massive expansion of biodiesel capacity is currently taking place across the EU in anticipation of future demand, especially from India and China.

The biodiesel demand in India is likely to increase multifold as the government is planning to make 5-10 per cent blending mandatory in the near future.

Although the Chinese government has already hinted at not slowing industrial development because of global warming, it is still considering cheap energy sources for environmental protection, where biodiesel is going to play a major role.

The implementation of different biodiesel initiatives around the world will lead to a structural increase in the demand for vegetable oils and, as a consequence, will have an influence on the prices and international trade flows of vegetable oils and biodiesel, the report said.

The report further said that a number of new players, including energy companies and non-agribusiness investors, were taking equity stakes in various biofuel ventures across the world in order to tap these potential opportunities. The supply and demand imbalance, combined with the existence of new players, will foster price volatility in the global vegetable oil markets, it added.

While biofuels are generally not economically viable when the cost economics of biofuels are compared to fossil fuel prices, the market will grow as long as there is strong support by governments in the form of (tax) subsidies and mandatory blending requirements.

According to current estimates, the demand for vegetable oils will rise by an additional 18 to 21 million tonnes over the next five years as a result of global biodiesel initiatives.

The volume exceeds the projected increase in vegetable oil demand from food consumption by 40 to 60 per cent. Rising vegetable oil consumption in developing countries will drive the demand for palm oil to a greater extent at the expense of higher-priced oils such as soybean and rapeseed oil.