palm oil price reached a two-year high this month and rose 15 per cent in the past year, outperforming the crude oil used for most diesel.
It's official: Money grows on trees Surging demand for crude alternatives has pushed palm oil to a two-year high
CLAIRE LEOW and SAIJEL KISHAN
Bloomberg News
JAK ARTA, LONDON -- The best-performing oil investment comes from trees in Malaysia, not the deserts of Saudi Arabia.
Vegetable oils from palm trees normally used in Hellmann's mayonnaise and Snickers chocolate bars are being converted to diesel for Mack trucks after the price of oil has more than doubled in the past three years and governments have encouraged renewable fuels. The palm oil price reached a two-year high this month and rose 15 per cent in the past year, outperforming the crude oil used for most diesel.
Palm oil in Kuala Lumpur may rally 20 per cent in the next six months as factories making so-called biodiesel sprout from Beijing to Seattle, said Michael Coleman, who helps run a $370-million (U.S.) hedge fund in Singapore.
In Europe, where one of every two new cars sold burns diesel, biodiesel output will double by 2008 to meet European Union targets for alternative fuels use, the International Energy Agency in Paris forecasts.
The European Union ordered that 5.75 per cent of all fuel for trucks and autos must come from renewable sources by 2010. Fuel production from vegetable oils worldwide is expected to triple by 2008, with most of the growth in Europe, the IEA forecasts.
Supplies of diesel fuel from vegetable oils soared 80 per cent in 2005, the agency said in July. That outpaced a 14-per-cent increase in production of ethanol, a fuel derived from corn and sugar that's used as an alternative to gasoline.
Crude oil reached a record $78.40 a barrel last month and has driven up the cost of diesel and gasoline, making biofuels more competitive. Palm oil costs $507.50 a tonne in Europe, less than the about $680 a tonne of crude-oil-derived diesel. Governments are subsidizing biodiesel to diversify energy supply and reduce greenhouse gas emissions.
Vegetable-oil-based diesel is made through a chemical process where the glycerin is separated from the fat, or vegetable oil. The process leaves behind two products -- methyl esters, the chemical name for biodiesel, and glycerin, a byproduct usually sold for manufacturing in soaps and antifreeze.
Palm oil comes from bunches of plum-sized fruit on the tree, which becomes productive about 30 months after planting.
In Europe, biodiesel costs the equivalent of 72 cents a litre to produce, according to New Energy Finance Ltd., a London-based advisory company. A litre of diesel fuel sells for 81 cents on the wholesale market.
"As long as crude oil is above $50 a barrel, there is a momentum to biofuels that is unstoppable," said Mr. Coleman, of the Cayman Islands-domiciled Merchant Commodity Fund, which has returned 42 per cent in the past year. "It doesn't matter what happens to crude." Oil has traded above $50 since May, 2005.
"The industry has got to a critical mass whereby it can weather downturns in the price of crude," said Andrew Owens, chief executive officer of Greenergy International Ltd., a biofuel supplier in London to retailers including Tesco PLC, Britain's largest supermarket company. "That wasn't the case two years ago."
Palm oil isn't just for trucks and cars. A British unit of RWE AG, Europe's third-largest utility, may convert a power plant to burn palm oil after it evaluates the costs and technical issues, spokesman Leon Flexman said.
Biox Group BV, a biofuel producer based in the Netherlands, will have the first of four power plants running near Vlissingen, the country's third-biggest seaport, early next year. The power will be sold to a Norwegian aluminum smelter.
"Right now, palm oil is the cheapest and most efficient of vegetable oils," said Biox finance director Edgare Kerkwijk, who moved to Singapore last year to be closer to the suppliers in Malaysia and Indonesia. "We need 100,000 tonnes a year. We can switch to other fuels when palm oil becomes too expensive."
U.S. use of vegetable oils for fuel is increasing too. Nationwide, 65 plants have a total capacity to produce 395 million gallons of diesel fuel from soybean oil and other supplies, according to the National Biodiesel Board in Jefferson City, Mo. An additional 714 million gallons of capacity is expected to be completed in the next 18 months.
Carlyle Group, which oversees more than $40-billion of private equity funds, and Riverstone Holdings LLC, which manages $6.5-billion, have announced plans for a controlling stake in Green Earth Fuels LLC, which will build two plants in the United States, each capable of producing 43 million gallons a year.
Singer Willie Nelson set up Biodiesel Venture GP with Peter Bell of Distribution Drive and three partners in December, 2004. Distribution Drive is a unit of Earth Biofuels Inc., whose shares have gained ninefold in the past year. The Standard & Poor's 500 stock index rose 6.8 per cent in that time, and the S&P integrated oil & gas index gained 18 per cent. |
