Interview: Palm Oil Industry's Bio-fuel Hopes Overstated

Recent optimism of surging demand for palm oil as a fuel substitute in Europe may be overdone as there are still major obstacles to the use of the commodity in this emerging sector, a European bio-fuels industry official said. As the cheapest edible oil in the world, palm oil does have a bright future as an alternative to conventional mineral oil. But for now it is premature to expect huge volumes to be consumed – at least not for another year or so, said Ard van de Kreeke, managing director of Dutch bio-fuels trading company Biox Group BV.

“Yes, there is a future (for palm oil). But it’s not the sort of thing which is going to happen the next month or next year. It’s a long-term thing,” he said in an interview. “It’s a market that is slowly developing, but, that is, at the moment, highly overestimated,” he said.

Rising crude oil prices in recent months have spurred intense speculation in the palm oil industry of a boom in demand for palm oil for burning purposes, particularly from major bio-fuel users such as Europe. Those hopes triggered a run-up in benchmark Malaysian crude palm oil futures prices which reached six-month highs in September, though the market has since relinquished some of its gains.

Van de Kreeke said the rally is unwarranted as the market is expecting too much, too soon. In reality, the current consumption scenario for palm oil fuel in Europe isn’t all that dramatic.

The bulk of the palm oil that is being used is in the form of palm fatty acid distillate as bio-mass for power plants, as opposed to bio-diesel for motor vehicles, where indigenous rapeseed oil has a virtual monopoly.

“Today, what you see for palm oil is that there is an existing market (for palm bio-mass). People may be talking about millions of tons of palm oil, but the actual total which went into energy is 500,000 tons (a year),” Van de Kreeke said. “That market (emerged) a year ago and volume is now stable (but) not growing at all. And to be honest, in the last two months, that market has been very much under pressure,” he added.

Environment Concerns Hurting Palm Oil

Biox is one of Europe’s biggest suppliers of bio-fuels to the energy industry. To be sure, the company believes in palm oil’s long-term potential as demonstrated by the company’s aggressive expansion plans, which include the building of power plants using palm oil. However, in the short term, there are crucial unresolved issues inhibiting palm oil’s market penetration, Van de Kreeke said.

Within the bio-mass sector, growing criticism about the palm oil industry’s environmental-related practices is one of the key stumbling blocks. The pressure on the palm oil bio-mass market witnessed in the last two months has been partly because of such concerns.

“The whole perception on palm oil has been very negative the last couple of months because all the NGOs are focussing on the sustainability issue,” he said.

Environment and conservation groups, especially those in Europe and the U.S., have frequently slammed palm oil producers Malaysia and Indonesia for destroying rain-forests and wildlife to clear land for plantations. The criticisms have intensified this year just as palm oil is set to overtake other oils such as soy oil to be the world’s main vegetable oil in terms of production.

Van de Kreeke said the palm oil industry needs to answer the sustainability questions before it can make significant inroads into the European energy market. Uncertainty over subsidies is also restricting growth of palm oil in the bio-mass sector.

Van de Kreeke said the use of vegetable oils in power plants in Europe is highly dependent on the extent of subsidies given by governments to promote renewable, or “green” energy sources.

“There is a big gap between what is feasible with and without subsidies,” he said, adding that clear, long-term subsidy schemes were still not in place in many European countries. If anything, the most recent development on subsidies has been rather ominous.

The Dutch government unveiled in early October plans to cut subsidies for bio-mass energy projects, saying such ventures were now profitable and no longer needed government support. That is potentially bad news for palm oil as the Netherlands accounts for about 70%-to-80% of the palm oil bio-mass currently being used in Europe.

“That means 70%-to-80% of the existing market for palm oil is coming under pressure,” he said.

Palm Diesel Not Feasible Without Subsidies

As for fuel used in the transport sector, more commonly known as bio-diesel, sustainability and subsidies are also the main factors impeding palm oil’s breakthrough.

“Today, bio-diesel from palm oil is not feasible. Bio-diesel is very much focussed on rapeseed oil, which is subsidized by the government,” Van de Kreeke said. “We would definitely like to build a palm oil bio-diesel plant if the market is there. But today it is difficult,” he said.

Market talk of millions of tons of palm oil going toward bio-diesel use, therefore, appears far-fetched for now, as it is difficult to foresee European governments supporting a product that is in direct competition with indigenous oils, he noted.

His comments mirror those made recently by other European industry officials.

During a recent conference in Malaysia, Raffaello Garofalo, secretary general of the European Biodiesel Board, said environmental concerns and agriculture policies are likely to limit room for palm oil use in the European bio-diesel market.

Van de Kreeke added that the success of palm oil diesel is also dependent on mineral oil prices staying at high levels. He said for palm oil diesel to be economically viable, without subsidies, crude oil needs to stay above $60 a barrel.

Biox Has Long-Term Expansion Plans

Still, palm oil’s price advantage over other oils makes it an attractive proposition for bio-fuels for the longer-term once subsidy and sustainability issues are resolved. “Palm oil is a very good bio-mass because the cost price per ton is very low if you compare to soy, rapeseed and other vegetable oils,” Van de Kreeke said.

Biox’s confidence in palm oil’s prospects has prompted the company to embark on a project to build three 50-megawatt power plants in the Netherlands, which when ready in 2007, will each use up to 100,000 tons of palm oil a year. The company has already signed contracts with Malaysian producers to fix its palm oil supply for 10 years for the plants. Subsidies and the selling price of the electricity produced have also been fixed for 10 years, Van de Kreeke said.

As part of preparations to handle larger volumes, Biox has also bought a tank terminal in Rotterdam and is building another one in Vlissingen, where the company is headquartered. Biox is set to officially launch its Malaysian office in November, and in the longer term, has plans to expand upstream into plantations as part of measures to ensure consistent supply.

(Cf. news of Sept. 30, 2005 and May 11, 2005.)