Bio-fuel demand up as oil soars

Soaring crude oil prices and environmental concerns are likely to propel the demand for bio-fuel in the coming months leading to firming up of edible oil prices, industry experts said. A larger share of edible oil output is likely to be diverted towards bio-fuel production-which will add pressure on existing supplies, they said.

The sudden spurt in crude mineral oil prices has led to an increased interest in use of vegetable oil to produce bio-fuel. Bio-fuel is used by the industry as well as by automobiles as a substitute for conventional fuel. Crude mineral oil prices had touched a record high at around US $70 a barrel last month.

"With crude mineral oil prices soaring, the need for bio-diesel will increase in the coming days," said M R Chandran, director, InteBio Tech Corp Sdn Bhd, Malaysia.Bio-fuel is liquid or gas fuel produced from processed vegetable oils.

"There is a growing supply-demand mismatch as far as vegetable oils are concerned," Chandran said.Global production of vegetable oils will rise by 5.3 million tonne in the season ending October next year while the demand is expected to rise by 6.0 million tonne during the year, according to industry experts.

The European Union is one of the major drivers of the demand for bio-diesel, closely followed by the US.

Vegetable oil used for fuel purposes is not taxed in the European Union and the US, Chandran said.

"The current bio-diesel capacity in the US requires 600,000 tonne of soyoil annually," said Dorab Mistry, director, Godrej International Ltd.

The US is likely to need 1.6 million tonne of soyoil in 2006-07, he added.

According to US Department of Agriculture, soyoil ending stocks for 2005-06 are seen at 725,000 tonne. This gap would lead to depletion of global soyoil stocks and spur soyoil prices, Mistry said.

The European Union currently consumes around two million tonne of bio-fuel per year, which is likely to be doubled by 2010, Chandran said.

"There is not enough vegetable oil supply to meet consumption demands.This additional demand for bio-fuel will only add pressure to the existing supplies," he said.

Chandran also sees a slowdown in edible oil output growth, Chandran said."Malaysia's palm oil output is likely to stagnate to 20 million tonne per annum by 2010 and this will also put a curb on its palm oil exports," he said.

As Malaysia is the world's largest producer of palm oil, lower exports from the country will add pressure on global supplies-thus leading to a rise in edible oil prices, he said.

Mistry said soy acreage in Brazil is also likely to stagnate or decline, exerting further pressure on supplies.

"Bio-fuel will be the main driver of prices (of edible oil) in the coming days," he said. "By February, I see palm oil prices rising to 1,600 ringgits a tonne." (1 ringgit= Rs11.70)

"Crude palm oil prices can easily touch 1,500 ringgits per tonne by next year," said James Fry of UK-based LMC International. Refined soybean oil is likely to touch $460-500 per tonne free on board by the end of February, Fry said. The current soy oil rates are $350-400 per tonne.

"Soyoil rates are likely to touch $580 per tonne cost, insurance, freight by next year," he said. The current soyoil rate is $515 per tonne.

Prices of refined bleached and deodorised palmolein have already breached $400 per tonne free on board and will now gradually move toward $450, Mistry said.

"With faster growing economies and growing population, the demand for edible oil will only rise pushing prices higher," said Thomas Milkea, director of Germany-based ISTA Milkea GmbH.