KUALA LUMPUR: Major biodiesel players in the country have halted production as record high crude palm oil (CPO) prices have made their operations too expensive to sustain.

The Edge understands that two major producers, Sime Darby Bhd and Carotino Sdn Bhd, have ceased production since last year.

“The margins are too narrow and with the CPO price now soaring to RM4,000, what is the point in producing biodiesel now? We would be running at a loss,” said a company official on condition of anonymity.

Palm oil futures for March, April and May delivery closed RM293 lower on Friday at RM3,684, RM3,707 and RM3,710 respectively.

Carotech Bhd’s managing director David Ho said: “We hope CPO prices will continue to fall to a more reasonable level to drop back to RM2,400 to RM2,700 a tonne. At this level, biodiesel production may have a chance.

“At this juncture, we are focusing more effort on phytonutrients and we are working on reducing consumption CPO in the near future,” he said. The company recently started its second biodiesel plant and was producing 40,000 tonnes.

“There was a certain premium between the price of biodiesel and CPO. However, the recent price of CPO has eroded that premium,” Ho said in an email interview.

“The situation now is not feasible and I doubt other biodiesel companies would be able to sustain their operations. It would be very difficult,” a company official said, adding it was a loss-loss situation for biodiesel companies, as costs would still be incurred when plants were not producing.

According to a Reuters survey of biodiesel projects in the region, Malaysia only has seven plants running, mostly below capacity, despite giving out biodiesel licences to more than 90 firms.

The biodiesel projects were touted to have a combined capacity of nearly 10 million tonnes, or some 200,000 barrels a day. However, it was estimated that production would come under 100,000 tonnes, Reuters said.

The survey also showed 14 projects with a combined capacity of more than two million tonnes were either shelved or delayed.

Consulting firm Frost and Sullivan’s industry manager on technical insights into Asia-Pacific, Vijay Shankar Murthy said: “For CPO based biodiesel production, we must look at CPO to trade at RM2,200 and this is unlikely to happen in the next 12 months, as prices are likely to stay the same.

“For plants to begin producing biodiesel sooner, they have to look at alternative raw materials for production, such as japtropha and algae. Till then, we expect further delays of another 12 months in the production of biodiesel on a commercial scale,” he said.

The grim outlook for biodiesel has also spread to Indonesian players, including PT Sinar Mas Agro Resources & Technology which had scrapped its US$5.5 billion (RM17.8 billion) venture with China National Offshore Oil Corporation and Hong Kong Energy Ltd, according to a newswire report.

Despite the gloomy near-term outlook for the sector, a foreign player which is building two plants in Malaysia. said it would commence operations as planned in the second half of this year. The plants have a combined output of 350,000 tonnes per annum, with the US and European Union (EU) being the main target markets.

“It is going to be difficult, with the high raw material and CPO prices, but the ‘splash and dash’ practice for biofuels in the US and the EU’s biofuel mandate would give us a level playing field,” said a senior company official.

Under the US Federal measures adopted in 2004, biodiesel can be subsidised up to US$300 (RM900) a tonne. By adding a drop of mineral diesel to biodiesel producers can claim a maximum subsidy for a ‘B99.9’ blend. The blend could then be exported to Europe where it would be eligible for Europe’s subsidy schemes.

“Our business is based on the mandatory blend programmes, so while times are going to be tough in the short term, our outlook for 2009 is good given that mandatory blending could be coming into force from May this year,” he said.

But Europe was rethinking its position on biodiesel, said Thomas Mielke, the director of the influential OilWorld magazine. He recently told the Bursa Malaysia annual palm and lauric oil seminar that Germany, the largest biodiesel consumer in EU, had started to review its stance on biofuels.