Large Argentina grain distillers could expand

BUENOS AIRES, Sept 24 (Reuters) - Argentina's largest grain distillers could sell up to 600,000 tonnes of biodiesel per year in local markets starting in 2010, if they receive a pending government authorization to provide the fuel.

Starting next year, all fuels sold in the country will require a mix of at least 5 percent of biofuels, according to a law first passed in 2006.

The measure was devised to help bring small distillers to the nascent biofuel market, but the government now fears those smaller players won't be able to meet the demand and may allow large companies to temporarily supply the necessary biofuel.

Companies such as Bunge (BG.N) and Louis Dreyfus and Aceitera General Deheza -- among Argentina's largest grain processors -- are already in talks with the government to temporarily cover the gap for the smaller distillers.

The government will create an internal registry of large suppliers interested in providing the biofuel, Claudio Molina, executive director for the Argentine Association of Biodiesels and Hydrogen, told Reuters.

Argentine biodiesel production, mostly exported, grew in the past years with big investments and installed capacity is near 2 million tonnes.

The small- and mid-size plants authorized to supply the local market produce about 200,000 tonnes, significantly lower than the 600,000 to 800,000 tonnes that will be needed for the fuel mix in 2010.

"It's clear that four months from now we won't reach the necessary amount of (small) companies to meet demand," said Federico Spitznagel, of the Argentine Chamber of Renewable Energy. "What we're looking at is the possibility of letting all exporters supply for a limited time in the local market."

In the project being discussed, the government will evaluate once a year the need for the larger companies to participate in this market.

MARKET VOLATILITY

Disputes between farmers and the government on issues ranging from taxes to regulations and, more recently, the global economic slowdown all hindered development of the small-scale companies, industry sources said.

Incomplete regulations for the still-developing biofuel market also posed a major setback.

"All this time we had lots of volatility in the markets -- with the financial crisis and the farm crisis," said Guillermo Garcia, a spokesman for the Argentine Chamber of Biofuels. "It's a new market and not everything was explicitly stated."

In addition, the law also will require the use of sugar-based ethanol in gasoline, but a shortfall in ethanol production is expected, which in turn may lead the government to review the percentage of each fuel required in the mix.

(Reporting by Maximilian Heath; Writing by Luis Andres Henao; Editing by Fiona Ortiz and David Gregorio)