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Biofuel output seen up on lower feedstock costs

Global biodiesel output is likely to climb 27 per cent to 14 million tonnes in the 2008-09 oil year as producers capitalize on weak raw material prices and absorb excess inventories, a leading industry analyst said Dec. 3.

Alternative energy fuels would be the only source of additional demand growth for vegetable oils, as demand from the food sector is expected to be flat, thanks to the credit crisis, said James Fry, managing director of Londonbased LMC International.

“In the way economies are going, I probably feel that in the 12-month period, demand growth for meal and vegetable oils is destroyed. The only growth in demand could very well come from biofuels,” Fry told Reuters.

“The gains for biodiesel in the new oil year are partly because high vegetable oil prices made biodiesel uncompetitive in the previous oil year unless there were subsidies.”

Prices of vegetable oils such as soyoil, rapeseed, sunoil and palm oil have galloped to record highs in a two-year rally from 2006, which came to a halt just months ago as investors sold down commodity markets to seek safe havens from the financial crisis.

Biodiesel mandates only worked in soyoil exporting nations such as the U. S, Argentina and Brazil where massive subsidies were in place to soften the impact of high feedstock prices.

However, palm-based biofuels have never really taken off in top producers Malaysia and Indonesia until recently when both governments rushed to shore up recent faltering prices with biodiesel mandates that will start next year.

Palm oil plummeted nearly two-thirds from record levels of 4,486 ringgit (US$1,233) per tonne hit in March and soyoil tumbled 57 per cent from a peak US71.26 cents per pound in the same month.

The drastic falls in vegetable oil prices since March have compelled top Asian consumers China, India and Pakistan to default or defer cargoes of palm oil and soyoil, which was the first instance of trade flows getting suffocated, Fry said.

Demand growth for vegetable oils from the food sector in the oil year to September 2009 could be minimal or even flat at 105 million tonnes as traders are unable to secure enough credit despite low prices, Fry said.

“Potential demand would be there at low prices but the overseas buyers via their traders cannot actually get to finance those trade flows and that obviously means there is demand destruction,” he said.

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