Malaysia to Force Transport, Power Industry to Use Palm Biofuel

By Manirajan Ramasamy and Angus Whitley

Dec. 10 (Bloomberg) -- Malaysia’s government will force transport companies and power generators to use palm-oil based biofuel by January 2010 to create extra demand for the country’s biggest agricultural product.

By then, it will be impossible for Malaysia’s buses and trucks to buy pure diesel at the pumps, Minister of Plantation Industries and Commodities Peter Chin said today. Businesses operating generators that run on diesel will also have to start burning the 5 percent mixture, he said.

Malaysia, the second-largest producer of the edible oil, is trying to soak up stockpiles of the commodity and spur usage after prices slumped in a global recession. Higher revenue from palm oil may help control a budget deficit that the government expects will next year match the largest overspend since 2003.

“We are not happy” with the price, Chin told reporters in Kuala Lumpur. He reiterated all government vehicles will run on biofuel from February next year.

About 500,000 tons of palm oil will be consumed annually when all state-owned vehicle fleets, power producers and transport companies use biofuel, Chin said. State-owned utility Tenaga Nasional Bhd. doesn’t own diesel generators, he said.

Malaysia will produce 18 million tons of palm oil in 2009, Chin said last month.

The price of palm oil, mostly used in cooking and in soaps, has tumbled 55 percent in the past six months on concern demand for commodities will fall. The oil, which reached 4,486 ringgit ($1,241) a ton on March 4, today fetched 1,595 ringgit.

Chin’s deadline for using palm oil-based biofuel follows a call last month by Malaysian palm oil producers, which include government-controlled Sime Darby Bhd. and IOI Corp., for the government to burn palm to make electricity, reducing stockpiles and driving up prices.

The decline in the price of palm oil has left some smaller growers running at a loss, Chin said.

“Especially those having young palms, their cost is very high, and much higher than 1,500 ringgit,” the minister said. “Some have heavy borrowings from the banks and all this adds up to more than 1,500 ringgit.”

To contact the reporters on this story: Manirajan Ramasamy in Kuala Lumpur at rmanirajan@bloomberg.net; Angus Whitley in Kuala Lumpur at awhitley1@bloomberg.net