"It firmly establishes Malaysia as a user of biodiesel and will affirm its leadership position in the use and production of palm-based methyl ester," said Long Tian Ching, managing director of Vance Bioenergy, Thursday. Vance owns two biodiesel plants with a total production capacity of 180,000 mt/year in Pasir Gudang in the southern Malaysian state of Johor.

"I applaud the government in this bold move as it helps to make Malaysia self-reliant on its biggest natural resource -- palm oil -- and extends the life of its depleting domestic hydrocarbon resource," Long added.

Andrew Goh, chief financial officer of Carotech Berhad, a producer of palm oil nutrients, said "although it is delayed, it would be good for the industry. Nevertheless, much needs to be done on the infrastructure and we await the final implementation." Carotech operates two plants in Perak that produce more than 120,000 mt/year of biodiesel.

Malaysia's Plantation Industries and Commodities Minister Bernard Dompok said in a statement on Wednesday that the plan to introduce a B5 mandate -- a blend of 5% palm oil and 95% diesel -- will be implemented in stages in several central stages from June 2011.

"It is universally recognised that fossil fuel reserves are finite and fast depleting. As such, renewable energy sources need to be found to complement the needs of energy requirements," he said.

Dompok said the government will set up six petroleum depots with blending facilities at an estimated cost of Malaysian Ringgit 43.1 million ($12.9 million). The ministry will meet with petroleum companies at a later date to sort out logistics of the implementation, he added.

Market observers have said direct government support in the form of mandates or tax breaks is needed for a biodiesel market to reach its full potential. In addition, biodiesel also helps reduce reliance on fossil fuels and cut down on greenhouse gas emissions.

"Malaysia can rely less on importing diesel in the future if it has a strong biodiesel industry," Long said.

Malaysia, the world's second largest exporter of palm oil, has approved 56 licenses for biodiesel production, which account for a production capacity of 6.8 million mt/year.

--Weilyn Loo, weilyn_loo@platts.com