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Gargi Shah

Demand likely to increase over the next few years

Mumbai , Sept. 28

The entire vegetable oil fraternity is focused on a new demand factor — bio-diesel — that is expected to kick in over the next few years. This has created an anomalous situation of players expressing a bullish sentiment (bio-diesel demand) in what should normally be a bear market (record production). The global oil outlook for the year 2006-07 would be subject to progress in setting up of bio-diesel plants in different parts of the world including the EU and the US.

To what extent and when these bio-diesel capacities can be decisively factored into the oil outlook?

The EU has set out indicative policy targets for usage of 2 per cent and 5.75 per cent bio-diesel of the total diesel consumption by 2005 and 2010 respectively.

Bio-Diesel Industry

The EU is currently using around 1.4 per cent bio-diesel.

The EU produces bio-diesel mainly from home-grown rapeseed and soya oils, which are costlier than the palm oil imported from Malaysia and Indonesia. The two major palm-producing countries are expected to contribute substantially for the deficit in the EU demand, says Mr Allan Bullion, Deputy Editor, World Ethanol & Bio-fuels UK. He believes that bio-diesel industry is a reality in the EU, while in Asia it will come on line within 12-18 months.

From the beginning of 2006, direct demand for bio-diesel has been a reality in Indonesia, says Mr Derom Bangun, Executive Chairman, Indonesian Palm Oil Association. The Indonesian Government is encouraging the use of bio-energy with an objective of using 5 per cent palm-based bio-diesel in the total energy use by 2025, due to heavy burden of petroleum subsidies. There has been a quick conversion of Indonesian chemical plants into bio-diesel plants and six new plants will be in operation by 2007 with an output of nearly 6 lakh tonnes for domestic market, Mr Bangun said.

Indonesia is expanding its plantation base expecting a 9 per cent increase in the palm oil output from 15 million tonnes (MT) projected till December 2006 to 16.3 MT by December 2007, edging the country past Malaysia as the world's top producer.

Palm Oil

While indicating a rapid growth in bio-diesel demand higher than in the palm oil production, Mr Bangun expects an upward movement of prices in Indonesia. The origin is expected to export around 11.3 million tonnes (mt) in 2007 only after satisfying its domestic demand of around 3.7 mt. Both Indonesia and Malaysia have agreed to set side 6 mt each per year of palm oil for the conversion into bio-diesel. However, it is unclear when this agreement will actually take effect.

Expansion of bio-diesel production combined with an expected 5 per cent drop in the soyabean acreage in Brazil will consequently curb Brazilian exports of soya oil by 10 per cent in 2006-07 and by 40 per cent in 2007-08, says Mr Dorab Mistry, London-based Director of Godrej International Ltd.

Looking at the incremental supply and demand the picture looks bullish. However, the effect of high prices will be a slowdown in demand growth and force demand to match supply, asserts Mr Mistry. In spite of the established link between crude and vegetable oil prices, within the EU, bio-diesel demand will continue to grow because of mandatory usage, notwithstanding changes in crude prices.

Vegetable Oil

While the vegetable oil fraternity unanimously agrees on a negative demand supply differential, they seem to be uncertain as to when this tightness will actually kick in. It remains to be seen when the high production of vegetable oil and large inventories seen at present will transform into supply tightness.

While acknowledging higher demand growth over production, one has to consider the limitations of feedstock supply (vegetable oils), said Mr Thomas Mielke, editor of Hamburg-based weekly Oil World. He believes ambitious industries must consider the limitations of using vegetable oils as raw material. If bio-diesel continues to be a long-term proposition, then a long-term view on ensuring sustained availability of vegetable oil as raw material should get priority, says Mr Mielke.

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