With oil prices rising more than 18 percent this year to about US$72 a barrel, countries around the world are increasingly turning to "green" fuels that can be produced from renewable resources such as sugar, corn and palm oil.

"The first biodiesel plant will start operations in July or August. That will deplete existing stocks of palm oil," Chin told Reuters late on Wednesday in Malaysia's administrative capital of Putrajaya.

"Assuming that all biodiesel plants start operations as per schedule, we are aiming to produce up to 120,000 tonnes of biodiesel in 2006 and 500,000 tonnes in 2007. The entire amount will be exported," he added.

Malaysian palm oil prices have gained more than three percent this year. On Wednesday, the July benchmark crude palm oil contract fell 7 ringgit to close at 1,458 (US$404.1) a tonne. But on Thursday, the July contract was trading one ringgit higher by the midday break, after rising four ringit earlier.

"The weaker ringgit prevented further losses," said one Kuala Lumpur trader. "The minister's comments were friendly for the market, although it's more for the longer term. The market was a bit oversold and some buying took place early."

Another trader added: "The minister's comments are certainly a feel-good factor for the market."

Chin said the Malaysian government had so far received 50 applications from local private companies and foreign firms to set up biofuel plants. The government has approved 14 of them.

"Most approvals are for joint ventures between local and foreign firms," Chin said. "We will encourage more foreign investment in this area. With feedstock available at their doorsteps, there is a lot of interest."

PRODUCTION AND EXPORTS

Chin said that in addition to demand from the country's biodiesel plants, rising orders from the United States and China would push Malaysian crude palm oil prices to 1,600 ringgit a tonne later this year.

"The continued high crude petroleum prices is expected to make a strong impact in the longer term price outlook for palm oil," Chin added. "The abolition of the import quota on palm oil in China is an apportunity for us."

"In addition, high palm prices should help financial earnings of our plantation companies," he said.

The plantation index on the Kuala Lumpur Stock Exchange has gained 21 percent so far this year and was at 3,404.99 on Thursday.

And plantation companies have benefitted from the bullish outlook for palm oil. On Wednesday, shares of IOI Corp Bhd closed at a record price of 15.30 ringgit.

Chin added that Malaysia's palm oil exports could rise to 13 million tonnes in 2006 from 12.58 million tonnes last year.

He said Malaysia's crude palm oil output this year would rise by only 1.3 percent to 15.1 million tonnes. Output has grown at an average annual rate of 8 percent over the previous three years.

"The lagged effect of previous dryness in key palm oil growing areas and the decline in the yield cycle following high productivity in previous years are expected to affect yields at least up to August," Chin said.

But he said rising Indonesian palm oil production and improving soybean yields in the United States could limit gains in global vegetable oil prices.

He also added that Malaysia was concerned about fast-dropping sales to India, which imposes a relatively higher duty on refined oils, copared with crude vegetable oils.

Indian palm oil purchases from Malaysia fell to 640,000 tonnes in 2005 from more than one million tonnes annually in the previous years.