Asian biodiesel plants sit idle as costs soar

That grim reality made Finnish refiner Neste Oil's announcement in November that it would build the world's largest biodiesel unit in Singapore all the more surprising, especially as it plans to use mainly palm oil for feedstock.

"The bottom line is that biodiesel is much more expensive than diesel, and I don't see much activity at the regulatory level," said Peter Cockcroft, a regional energy expert.

While some consumer nations like South Korea have pushed through small mandates that require domestic fuel to contain a certain percentage of bio-material, major producers have proven surprisingly reluctant to stimulate local demand.

Malaysia, which heavily subsidises domestic retail fuel thanks to hefty oil and gas export revenues, has indefinitely put off plans to introduce palm-blended diesel in the domestic market as the country would rather make more money selling palm oil to the food industry.

On top of this, palm oil, which was once considered an answer to the world's growing appetite for alternative fuels, faces questions about sustainability.

In Europe, policy makers and environmentalists consider the rapid expansion in Southeast Asia's palm estates responsible for the destruction of tropical forests and wildlife. Malaysia's palm oil sales to Europe from January to November were down a fifth from a year ago.

Nevertheless, many investors are sticking with it in hope that prices and policy will turn in their favor.

"We believe that you don't build a commodity business according to the cycle, you go in for long-term strategy," said Nathan Mahalingam, managing director of Australia-listed Mission Biofuels, which is building a second plant in Malaysia.

But he said: "It is a ridiculous price situation to be in and times are going to be challenging."

(Editing by Michael Urquhart)