France, Italy, Spain and the rest of southern Europe are still using 350 ppm diesel and will only switch to 50ppm in 2005 in accordance with European Union regulations.

Traders say many cargoes of the 10ppm fuel have already been sold.

"People are already preparing for the switch and at least 300,000 tonnes of 10 ppm diesel have been put in storage in Scandinavia," one Scandinavian trader said. "There is an increasing demand for the product."

Cargo prices for 10 ppm now are around $235 a tonne, about $10 higher than the 50 ppm diesel. Most deals are still kept confidential as players are unwilling to reveal their exact position on the new grade, most traders said.

Germany, Europe's largest consumer of motor fuels, will move to 10 ppm diesel and gasoline on January 1 2003, with the help of a 1.5 euro cents-a-litre tax break. It moved to 50 ppm fuels this January and will simply roll the subsidy over to 10 ppm.

The country is well ahead of schedule to meet European Union regulations on environment-friendly oil products that require all member states to be on 50 ppm motor fuels by 2005 and 10 ppm gasoline and diesel by 2011.

Some activity is also already evident on the derivatives market, where the 10 ppm barges and cargoes are quoted at a premium to 50 ppm diesel.

CONTAMINATION WORRIES

On the barge market, however, which ships large volumes of distillates to Germany, no deals have yet been seen. Dealers said trade would likely kick off in October when winter grade fuel becomes available. But the main issue was logistics.

"It's too expensive to have ULSD as well as 10 ppm as you must clean tanks and barges thoroughly each time." Traders say there will be enough fuel to meet market needs even if Finland and Benelux states also decide to move to 10 ppm diesel and gasoline next year. Most refiners have made the necessary investments to produce the clean fuel.

"If you have a sophisticated de-sulpherisation unit it is not difficult or much more expensive to make the 10 ppm," a trader with a refiner said. "The real issue is housekeeping. Storages and lines from the refineries must be very clean to guarantee a maximum sulphur content of 10 ppm."

Germany's switch from 350 ppm diesel in January this year created demand for additional barges because of contamination risks. A barge which carried 50 ppm fuel or 2000 ppm heating oil must be cleaned well before it can be loaded with 10 ppm fuel.

"The high cost of moving the logistics could lead to an initial rise in retail prices for 10 ppm like we had just before we moved to 50 ppm this year," one trader said.