said today it would consider cutting a diesel subsidy next year in a

bid to make its biofuel industry more attractive after production of

the alternative fuel virtually ground to a halt.

Malaysia has aimed to become a global leader in biodiesel, but

the once-vaunted industry has come to a standstill since March, when

the government delayed a move to require oil companies to sell it

alongside conventional fuels.

The plan was originally due to take effect in 2007 but will not now come into force until June 2011.

Malaysia Palm Oil Board (MPOB) figures show that the production

of biodiesel, a mixture of diesel and five per cent processed palm oil,

dropped 99 per cent from 12,640 tonnes in March to just 137 tonnes in

July.

government was looking at cutting the subsidy for diesel, which

currently costs RM1.75 (US$0.58) per litre, to encourage the use of the

biofuel.

“Because of the subsidy on diesel, it has somewhat distorted the

price for biodiesel to be utilised,” Dompok told reporters at the

sidelines of a palm oil conference.

“There is an element of increase in the pump price (of diesel)

and this is what the government is looking at I think by 2011.”

He said the new rule on biofuel sales was on track for June next

year, with the government providing funds to several oil firms,

including Malaysia’s Petronas, to set up biofuel blending facilities.

The fall of oil prices from mid-2008 highs, when biofuels were a

significantly cheaper alternative, has led many to stick to

conventional fuel, raising questions over the future of biodiesel.

The rising price of Malaysia’s palm oil means the cost of

manufacturing biofuels is high, and industry leaders are concerned they

cannot cover their costs without government subsidy.

Malaysia has approved 56 licences for biodiesel output, which

would create a production capacity of 6.8 million tonnes, but most

plants have not been set up.

Malaysia aims to produce 17.8 million tonnes of palm oil this

year with the country’s second largest palm oil firm, IOI, bullish that

prices would hit the RM3,000 per tonne benchmark “soon” due to tight

supply.

“There are rains every day and we have a labour shortage (on the

plantations),” IOI executive chairman Lee Shing Cheng said, adding that

he believes the government is working to resolve the labour shortage.

Palm oil was trading between RM2,650 and RM2,700 per tonne today.

Malaysia is the world’s second-largest exporter of palm oil after

Indonesia, and the two countries account for 85 per cent of global

production. — AFP