VZCZCXRO3988
RR RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHKL #1548/01 2920942
ZNR UUUUU ZZH
R 190942Z OCT 07
FM AMEMBASSY KUALA LUMPUR
TO RUEHC/SECSTATE WASHDC 0133
INFO RUCNASE/ASEAN MEMBER COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHRC/USDA FAS WASHDC

UNCLAS SECTION 01 OF 04 KUALA LUMPUR 001548 
 
SIPDIS 
 
SIPDIS 
 
USITC FOR L.M. SCHLITT 
STATE PASS USTR FOR WEISEL AND BELL 
 
E.O. 12958: N/A 
TAGS: ECON ETRD EAGR TBIO MY
SUBJECT: MALAYSIA BIOFUELS: INFORMATION ON INDUSTRIAL BIOTECHNOLOGY 
FOR USITC 
 
REF: STATE 133131 
 
¶1. Summary: The Malaysian government strongly supports the 
development of the biofuels industry, using the country's large and 
growing palm oil production as feedstock.  The recent passage of the 
Biofuel Industry Act will facilitate the industry's continued 
expansion, though the industry has benefited from years of 
incentives already. Retail sales of biofuel in Malaysia have not yet 
been introduced since they cannot compete against 
government-subsidized petroleum-based fuels. Seven biodiesel plants 
currently are in operation in Malaysia with total capacity of 
370,000 tons, though the current high prices for feedstock will 
likely result in actual biodiesel output of 280,000 tons in 2007. 
Capacity should expand to about 700,000 tons in 2008 with the 
expected completion of six more plants. End summary. 
 
Policies supporting production and use of biofuels 
--------------------------------------------- ----- 
 
¶2. Malaysia, with its large and growing palm oil industry, has the 
potential to play a major role in the world biofuel market. 
Malaysia is currently the world's number two producer and top 
exporter of palm oil.  Oil palm has the highest oil yield per 
hectare of all vegetable oil feedstocks, seven times greater than 
that of soybeans and three times that of rapeseed. 
 
¶3. Processed liquid palm oil (PLPO) can be used directly to power 
normal diesel engines or may be blended with petroleum diesel.  Palm 
oil can also be converted to methyl esters (biodiesel) through a 
process called transesterification.  This process combines refined 
palm oil, methanol, and a catalyst to produce the methyl esters. 
These methyl esters have performance characteristics similar to 
those of petroleum diesel without the environmental detriment of 
sulfur emission. 
 
¶4. In addition to a plentiful palm oil feedstock, the GOM's biofuel 
aspirations are abetted by a palm oil industry eager to begin 
biodiesel production, the interest of foreign investors, and also by 
the existence of the Malaysian Palm Oil Board (MPOB).  Pioneering 
palm biodiesel development since 1985, this government agency 
continues to develop efficient practices and to create new palm 
diesel products such as low pour point palm biodiesel, a palm 
biodiesel that is able to flow at lower temperatures (between -210C 
and 00C).  The MPOB is funded by the industry via a levy imposed on 
total crude palm oil production.  Around US$23 million was collected 
in 2006. 
 
¶5. The GOM is determined to further develop the palm oil industry by 
promoting the production and use of palm biodiesel.  The 
recently-passed Biofuel Industry Act (BIA) will allow an orderly 
development of the biofuel industry.  The most important clauses are 
Clause 4, which seeks to prescribe the type of biofuel and its 
percentage by volume to be blended in any fuel; and Clause 12, which 
contains provisions relating to revocation or suspension of a 
biofuel plant license. Clause 12 allows the licensing authority to 
revoke or suspend any license if the licensee has ceased to carry on 
or operate any biofuel activity for which the license is issued. 
 
¶6. The BIA is in line with MPOB's efforts to market a biofuel blend 
consisting of 95% petroleum diesel and 5% palm olein, referred to as 
Envo Diesel or B5.  B5 can be used to power diesel engines in the 
transport sector and also as fuel in the industrial sector for 
activities such as firing boilers.  (Note: this B5 biofuel differs 
from the European Union's B5 biodiesel blend, which contains 95% 
petroleum combined with 5% methyl ester.)  The GOM is currently 
running trials with the MPOB's B5 in government vehicles and private 
industrial entities with the intent of making it compulsory for 
diesel-consuming passenger vehicles, the transportation sector, and 
industries to use B5 in the near future.  It is estimated that 
500,000 metric tons of palm olein will be required annually to 
fulfill the B5 mandate.  This figure constitutes only 3 percent of 
the palm oil produced in Malaysia in 2006. 
 
Domestic Biofuel Use 
-------------------- 
 
¶7. In preparation for the B5 standard's implementation, the GOM 
initially intended to establish B5 fuel pumps and to increase public 
awareness of the new biofuel blend.  The GOM was also to encourage 
engine and auto manufacturers to extend their warranties to cover 
the use of B5.  The Minister of Plantation Industries and 
Commodities has stated that B5 will initially be sold at a price 
equal to the retail price of petroleum diesel, which is currently 
subsidized at a rate determined by the GOM.  With the current high 
prices of feedstock, B5 Envo diesel is unlikely to be commercially 
launched in the near future.  Sources indicate that the GOM will 
only mandate B5 use if palm oil prices decline to lower levels. 
 
KUALA LUMP 00001548  002 OF 004 
 
 
 
¶8. In Malaysia, biodiesel would have to compete with some of the 
lowest fuel prices in its region.  The GOM sets retail fuel prices 
below the market price and compensates retailers through subsidies. 
Increasing crude oil prices have put upward pressure on this 
subsidy, forcing the GOM to incrementally increase retail petroleum 
prices.  In February 2006, protests ensued from a US$0.08 per liter 
increase in both diesel and petroleum retail prices, and fuel prices 
have not increased again since then.  There is some speculation that 
the government will raise fuel prices in early 2008. 
 
¶9. Fuel subsidies are paid for through contributions from Petronas, 
Malaysia's national petroleum corporation.  Despite the fact that 
Petronas only accounts for about 30 percent of the retail petroleum 
market in Malaysia, its contributions are adequate to fully fund the 
fuel subsidies in the entire market. 
 
¶10. The GOM has eliminated the sales tax on retail petroleum 
products to alleviate price pressure and the incidence of the sales 
tax borne by the retail customer.  The sales tax on diesel of 
US$0.05 per liter was eliminated in October 1999.  The sales tax on 
gasoline of US$0.16 per liter was eliminated in June 2004. 
 
Biofuel Exports 
--------------- 
 
¶11. In addition to B5 biofuel produced for domestic use, the GOM is 
also greatly encouraging the production of methyl ester, primarily 
for export.  New energy standards, such as those in the European 
Union, are making the export of methyl ester increasingly attractive 
to palm oil companies. 
 
Incentive Programs 
------------------ 
 
¶12. The GOM is supporting the construction of biodiesel plants 
through tax incentives.  Because biodiesel is one of the products 
that is encouraged under the Promotion of Investments Act of 1986, 
biodiesel projects are eligible for Pioneer Status or Investment Tax 
Allowance (ITA).  A company with Pioneer Status is granted tax 
exemption on at least 70 percent of the income derived from 
biodiesel production for 5 years, with more revenue being eligible 
under certain provisions.  ITA, an alternative incentive that the 
companies can choose, is an allowance schedule that caters to high 
capital investment projects with a long gestation period.  Under 
ITA, companies are granted an allowance of 60 percent in respect of 
qualifying capital expenditure incurred within 5 years of the date 
of the first capital expenditure.  This allowance can be used to 
exempt up to 70 percent of the statutory income derived from 
biodiesel production in the assessment year.  Any unutilized 
allowance can be carried over to following years. 
 
¶13. Under both the Pioneer Status and ITA incentive schedules, the 
tax allowance increases under certain criteria such as the location 
of the project in a promoted area.  In order to further encourage 
the domestic palm oil processing industry, the GOM taxes exports of 
crude palm oil but does not levy export duties on processed palm oil 
or biodiesel. 
 
Biofuel Production 
------------------ 
 
¶14. Ethanol: There are no ethanol production plants currently 
operating in Malaysia.  The advent of a domestic ethanol industry is 
highly unlikely as an appropriate ethanol feedstock is not 
abundantly available in Malaysia.  Also, ethanol consumption is 
unlikely as retail gasoline prices are subsidized. 
 
¶15. Biodiesel: Experts say that the production of biodiesel, 
including oil palm-based biodiesel, did not become a viable fuel 
option until crude oil prices surpassed the US$50 a barrel mark last 
year.  In a November 2005 research report, Deutsche Bank concluded 
that as long as crude prices stay above this US$50 mark biodiesel 
makes financial sense within the European Union.  At a PLPO price of 
US$730 per metric ton, the cost of palm biodiesel production is 
estimated to be about US$0.77 per liter. 
 
¶16. Seven biodiesel plants are in operation in Malaysia with total 
capacity of 370,000 tons.  With the current high prices for 
feedstock, post estimates the actual biodiesel output for all of 
2007 should be around 280,000 tons.  Post expects another six plants 
with a combined capacity of about 700,000 MT to be completed by 
¶2008.  The companies that are making profits are those that had 
secured crude palm oil at lower prices as long as six months ago. 
Some companies are also changing their product mix, such as 
increasing the production of Vitamin E (a derivative from Crude Palm 
Oil) while others are looking to sell glycerin (a by-product) at 
 
KUALA LUMP 00001548  003 OF 004 
 
 
higher prices as its output is anticipated to increase slower in 
tandem with an expected smaller growth in biodiesel production. 
 
 
¶17. Biodiesel Projects Approved by the Malaysian 
Industrial Development Authority (as of October 2006) 
 
Company; Location' Foreign Participation 
 
1) MPOB Carotino Sdn Bhd; Pasir Gudang, Johor; 25% Singapore 
 
2) Biodiesel Technology Sdn. Bhd.; Kuantan, Pahang; 20% - Australia 
 
3) Global Bioenergy Resources Sdn. Bhd.; Nialai, Negeri Sembilan; No 
foreign participation 
 
4) InteBio Tech Corporation S.B.; Sitiawan, Perak; 100% - Australia 
 
5) Vance Bioenergy Sdn. Bhd.; Pasir Gudang, Johor; 90% - Indonesia, 
10% - Singapore 
 
6) Pgeo Edible Oils Sdn. Bhd.; Pasir Gudang, Johor; 3.9% - Others 
 
7) Empee Industries Berhad; Kuantan, Pahang; 100% - India 
 
8) SPC Biodiesel Sdn. Bhd.; Lahad Datu, Sabah; 15% - Australia 
 
9) Kulim (M) Berhad; Pasir Gudang, Johor; 6.9% - Others 
 
10) Success Nexus Sdn. Bhd.; Sitiawan, Perak; 30% - USA, 10% - 
Italy, 1% - Canada 
 
11) Ganz Biofuels Sdn. Bhd.; Air Keroh, Melaka; No foreign 
participation 
 
12) Zoop Sdn. Bhd.; Pulau Indah, Selangor; 10% - Japan 
 
13) Sarawak Plantation Biodiesel Sdn. Bhd.; Miri, Sarawak; No 
foreign participation 
 
14) Genting Biofuel Sdn. Bhd.; Pasir Gudang, Johor; 50% - Italy 
 
15) Survival Access Sdn. Bhd.; Manjung, Perak; 6.3% - Others 
 
16) Mission Biofuel Sdn. Bhd.; Kuantan, Pahang; 100% - Australia 
 
17) Zecon Plantation Sdn. Bhd.; Pasir Gudang, Johor; no foreign 
participation 
 
18) AM Biofuel Sdn. Bhd.; Pasir Gudang, Johor; no foreign 
participation 
 
19) IJM Plantation Sdn. Bhd.; Sandakan, Sabah; 40% - USA 
 
 
The above table shows the biodiesel projects currently approved by 
the Malaysian Industrial Development Authority (MIDA).  When all 
these plants are operational, it is estimated that Malaysia will be 
able to produce more than 1 million metric tons of biodiesel 
annually. 
 
¶18. The MPOB has worked with the Ministry of Plantation Industries & 
Commodities as well as Malaysian plantation companies to establish 
oil palm plantations overseas in Latin America and West Africa. 
This will further increase the supply of palm oil for Malaysian palm 
biodiesel companies. 
 
Import Regimes for Biofuels 
--------------------------- 
 
¶19. Malaysia does not levy import tariffs on biofuels.  There is no 
import tariff on crude palm oil, but there is a 5 percent duty 
levied on processed palm oil.  There are no duties on two common 
biofuel feedstocks: rapeseed oil and sunflower oil.  However there 
is a 5 percent tariff on soybean oil and its fractions. 
 
 
¶20. Key Malaysian Contact on Research and Development of Bio-Fuel: 
 
Dato' Dr. Yuen May CHOO 
Malaysian Palm Oil Board 
6, Persiaran Institusi 
Bandar Baru Bangi 
43000 Kajang 
Selangor 
P.O. Box 10620 
50720 Kuala Lumpur 
 
KUALA LUMP 00001548  004 OF 004 
 
 
Tel: 603-8925 9155/8925 9775 
Fax: 603-8925 9446 
Homepage: http://mpob.gov.my 
E-mail: choo@mpob.gov.my 
 
¶21. Embassy Contact: 
 
Raymond Hoh 
Foreign Agriculture Service 
U.S. Department of Agriculture 
Tel: (603) 2168-5182 
Fax: (603) 2168-5023 
Email: Raymond.Hoh@usda.gov 
 
KEITH