Bio-fuels in Bloom

Malaysia

Economic News

22 Jul 2010
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A British-Malay joint venture has announced plans for a new bio-diesel plant in the eastern province of Sabah. The announcement is the latest step in the rapid development of bio-diesel manufacturing in Malaysia.



Though such projects are good news for the producers of palm oil, a primary ingredient in bio-diesel, there are concerns about how the palm oil industry will be able to meet long-term growth in demand for bio-fuels.



The RM140m ($38.3m) bio-diesel plant will be located at the Palm Oil Industrial Cluster in Lahad Datu in Sabah. The announcement follows two days of intense negotiations among officials from the primary partners, Kuala Lumpur-based Zurex Corporation Sdn Bhd and Biofutures International PLC (BI), a renewable fuels firm from the UK. BI officials indicated to Sabah's Industrial Development Minister Datuk Ewon Ebin that they would provide development plans in the coming months.



Recently, Malaysia has embraced investment in bio-diesel. In 2005, plans were made for the construction of three bio-diesel plants. According to the Malaysian Industrial Development Authority, the government has approved 32 bio-fuels projects since the beginning of 2006. Last week, at the ground-breaking ceremony for a bio-diesel plant in Pahang, Deputy Prime Minister Najib Tun Razak emphasised not only the need for alternative fuels, but also how Malaysia's production of palm oil creates a positive outlook for Malaysia's bio-fuels potential.



Indeed, Malaysia is the world's leading supplier of palm oil - delivering half of global supply. The industry has long sought value-added ways to compete with growing palm oil rivals, particularly in Indonesia. The turn to bio-fuels to address this need is not unique to Malaysia. Other countries have also harnessed the fuel potential of their own commodities to boost agricultural sectors. For example, Brazil's advanced bio-fuels sector is a result of its abundant sugarcane, and the use of maize for ethanol in the US is on the rise, although President Bush has also touted switchgrass as an alternative. Unlike these, however, Malaysian producers have been increasingly sending its palm oil abroad for use in bio-fuels, particularly to European and Asian markets.



Malaysia has tapped into the Australian market, which is relatively developed in its use of bio-fuels, and Europe, particularly Germany, where the local biomass, rapeseed, is not available in sufficient quantities for large-scale bio-diesel production. The EU imports about 3.5 m tonnes of palm oil annually, and has set a target of 5.75% bio-fuel content by 2010. Just this week Bernama, Malaysia's national news agency, reported that several Chinese firms have sought Malaysian palm oil waste for bio-diesel production, and exports of palm oil to that country have increased by 20% in 2006.



In Malaysia, the government began using bio-diesel in many of its vehicles this year, and officials have consistently encouraged research and development of alternative fuels. And the onus is not merely on palm oil producers. Last week, Prime Minister Abdullah Ahmad Badawi urged major oil corporations to reinvest part of their profits into the research and development of renewable energy.



But the future of bio-diesel does not rest solely on securing investment in its manufacture. Palm oil growers are concerned that they will not be able to maintain sufficient palm oil production for food and other non-food purposes. Palm oil is a popular cooking oil, and is an important component of fat-substitute products and oleochemicals. Dato' Sabri bin Ahmad, the chief executive of Golden Hope Plantations, Berhad, one of the largest palm oil producers in Malaysia and a pioneer in bio-diesel manufacturing, told OBG that palm oil producers must be careful. "While we want to push bio-diesel, we must not overdo it so that it attacks the food sector," Sabri said.



Some land issues within the plantation sector also limits the potential of palm oil production. The total arable land in Malaysia is 12m ha, and while palm oil accounts from 5m ha, many believe that the maximum area for palm oil should be capped at around 6m ha. Widespread clearing of forests for agriculture is completely out of the question for Malaysia, and companies are reluctant to turn to genetically-modified means to increase yields. As a result, many of Malaysia's large plantation companies are currently operating palm oil plantations in Indonesia, to help offset the shortage.



Other exports such as cocoa, rice and rubber vie for growing space, and many question the wisdom of turning over too much land to a single, non-staple crop.



Such concerns could be justified if bio-diesel sceptics are correct. Many believe that the shelf-life of "first generation" bio-fuels technologies will be short-lived, as accelerated development could quickly lead to new and more efficient second-generation products. Such a scenario could lead to a rapid reduction in demand for the current biomass products, if not a total lapse. On the other end, car manufacturers are particularly uninterested in expensive redesigns for a technology that could be surpassed in a decade.



Bio-fuels' viability in the market is also uncertain. Though current high petroleum prices will likely endure, it is still not clear if bio-diesel prices can compete with those of fossil fuels without government subsidies or tax breaks to make them more attractive to consumers. Such measures are widely practiced in Europe and consequently, the continent is the world's most lucrative bio-fuels markets.



In the short term, however, construction of bio-fuels facilities continues. Earlier this month, construction began on a RM100m ($27.4m) bio-diesel and glycerine purification plant in Pahang. That project, an investment by Australian-listed Mission Biofuels Ltd., is set to produce 100,000 tonnes of bio-diesel per year, and is planned to be operational in July 2007.



The new plant envisioned for Sabah will be capable of producing 200,000 tonnes per year. The operation will employ 60 workers at full capacity, and will be financed through a public offering of Biofuture International's shares on the London Stock Exchange.

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