Wednesday, June 28, 2006

Global Demand For Biofuels & Malaysia
Carotech and Golden Hope

The growth in global demand for oilseeds such as palm and soy will exceed increases in production in the year to October, reducing stockpiles and sustaining prices, Oilworld trade publication said. Consumption will rise 17 million tons to 396 million tons, while production will increase 6 million tons to 392 million tons. The forecast production growth of 1.5 percent compares with an average annual growth rate of 4.2 percent in the preceding 10 years. The longer-term outlook is for a price appreciation in oilseeds and vegetable oils owing to increased demand for energy. Fundamentals have changed due to the boost in production of biodiesel and the resulting increase in vegetable oil demand. Governments worldwide want to increase biofuel use to curb reliance on fossil fuels, and curtail emissions of so-called greenhouse gases. The European Union has set a biofuel target of 5.75 percent of all gasoline and diesel sold by Dec. 31, 2010. Biodiesel is based on vegetable oils obtained from crushing palm, rapeseed and soybeans, or animal fat. Ethanol can be made from cereals, sugar beet and sugar cane.The price of soy oil, the world's most consumed vegetable oil, has risen by about a fifth this year to US$26.12 a pound on the Chicago Board of Trade. Soy meal futures have fallen 11 percent in the same period to US$174.70 a ton on the same board because of increased supply.

The U.S. is the world's largest producer of soybeans, followed by Brazil. Palm oil, the world's most traded vegetable oil, has gained 3.4 percent since the year started to 1,463 ringgit (US$397) a ton in Malaysia, the world's largest producer of the commodity. Palm oil may rise to an average US$475 a ton, or 1,749 ringgit, for the July 2006-June 2007 period, 10 percent more than the previous 12-month average. Oilseeds are crushed to produce oil, usually for cooking fats, and meal, largely for animal feed. Besides oil from oilseeds, world demand for oil is met through tallow, grease, and fish oil, among others. Demand for 17 oils and fats in the year starting October will rise 8.3 million tons, or 5.7 percent, to 153.1 million tons. That's faster than the growth in production, forecast at 7.03 million tons, or 4.8 percent, to 152.87 million tons. The forecast gain in tonnage is the lowest in three years. This would deplete inventories to 15.42 million tons from 15.7 million tons in the year that started October 2005.

Biofuel stocks continue to ignite interest in the US. VeraSun Energy Corp, an ethanol producer, made its debut on the New York Stock Exchange in the middle of the month and surged and surged. VeraSun's share price closed 30% higher from its initial public offering (IPO) price on its listing day. The listing exercise of VeraSun raised US$420mil (RM1.5bil) that will enable the company, which already operates two large ethanol plants, to build two more. Upcoming IPOs of other ethanol companies are therefore also expected to draw large sums of fresh capital to finance their expansion. VeraSun now has a market capitalisation of almost US$2bil. It's not all hype. The company reported a net profit of US$13.6mil in its first quarter, and it has large new capacities in the works. There is, however, much discussion in the US over the economics in the production of ethanol, extracted from sugar-rich crops, to replace petrol. The differences of opinion centre on huge government subsidies for corn - the feedstock for ethanol in the US - and some studies that claim that in the production of ethanol, fuel input is higher than the fuel output. According to these estimates, the amount of energy needed by tractors on the cornfields and in running the factories exceeds the output of ethanol. This energy loss does not occur in the production of biodiesel - the fuel that can replace petrodiesel.

This is, therefore, not an issue that Carotech Bhd faces. Carotech's second plant in Ipoh has just been completed and should be full production next month, just in time to contribute to its next financial year that starts on July 1. This new plant doubles Carotech's capacity, measured by crude palm oil input, to 90 tonnes a day. Next, it will construct seven new biodiesel plants in Lumut that will raise its capacity by 300 tonnes, or four-fold, to a total of 390 tonnes a day. Its expansion is not likely to end there. It may pursue continuous expansion, especially as the growth of biofuel demand is a global trend, it has a competitive production technology, and it will have the support of the capital markets.

The Malaysian government has approved 32 biodiesel-related projects worth 2.7 bln rgt which will churn out 3 mln tonnes of biodiesel. About 62 pct of the approved projects were domestic investment while the rest were from overseas including Australia, India, Indonesia, Singapore, Canada, Japan, Italy and the US. These projects, however, are still in various stages of implementation such as site acquisition, land purchase, loan application and plant construction and machinery installation. Golden Hope plans to build a biodiesel plant with an annual capacity of almost 400,000 tons, which will start operations in 2008. the plant is expected to generate a total net profit of 147 mln rgt, based on a net profit projection of 368 rgt for every ton of biodiesel. Golden Hope Plantations Bhd (GHope) hopes to hit a total annual production capacity of 390,000 tonnes of biodiesel when four of its planned facilities are up and running. In a press briefing yesterday, group chief executive Datuk Sabri Ahmad said about RM250mil would be invested in the four plants three in Malaysia and one in the Netherlands. Its first plant, Golden Hope Bioganic Sdn Bhd in Banting, which has begun commercial production of biodiesel, is expected to produce 30,000 to 35,000 tonnes annually. “It's a small amount compared with some plants that produce 60,000 to 100,000 tonnes a year, but it makes our quality control much easier,' he said.Sabri indicated that there already was interest in its product and the first shipment would go to “a big customer in Japan,' with a shipment of 2,000 to 3,000 tonnes per month. GHope will also be setting up another plant in Carey Island, Klang, together with the Malaysian Palm Oil Board. An allocation of RM20mil has been set for the plant, which is expected to produce 60,000 tonnes of biodiesel a year. Commercial production will begin next April. Sabri said the company was also in talks with a public-listed European company to set up a biodiesel plant in Rotterdam, which would have a capacity of 100,000 tonnes a year. The plant will cost GHope about 25mil euros. It will also build another plant near the port of Bintulu in Sarawak, in a joint venture with what he termed as “a big group?

I believe biofuels will be more than just a passing fad. These are the early birds, while others are still adopting a wait and see attitude. Should the biodiesel platform takes hold, this will create a very strong underpinning of the market price for palm oil. We may actually see a the entire sector being rated up over the next 2 years. It is best to follow the ethanol companies which are lining up to list, to see how they perform. Should consumers adopt the product and it be better distributed (and currently enjoys tax benefits too), we could see a revolution in the way palm oil is priced.

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