* Bunge, Cargill launching Brazil biodiesel plants
* Vale building palm oil plants in Amazon for fuel
* Producers eye Spanish market, export challenges
By Caroline Stauffer
SAO PAULO, Nov 7 (Reuters) - International firms are investing in biodiesel production in Brazil, a country on the verge of becoming the world's top grower of soybeans, the main source of the biofuel.
They are betting on increasing domestic demand, rather than export potential, in an emerging power that uses more diesel than gasoline. Many also believe Brazil's government soon will raise the amount of biodiesel required in diesel blends.
Bunge Ltd won approval last month to start operating a $30 million biodiesel plant in Brazil in 2013 and has said it is unlikely to build more sugarcane mills here due to the high cost of producing ethanol, a biofuel that the South American country pioneered.
Meanwhile, global grains trading powerhouse Cargill Inc. opened its first Brazilian biodiesel factory next to its soy processing plant in the Tres Lagoas municipality of Mato Grosso do Sul in August, a $64.5 million investment.
"Biodiesel is a relatively new market, and one that is growing in Brazil," Elcio de Angelis, Cargill's biodiesel manager in Brazil, told Reuters. "Because its main raw material is soybean oil, it complements our existing capabilities."
More biodiesel plants will increase demand for palm and soy oil, support prices of those commodities, and could make Brazil less dependent on expensive diesel imports it has long used to transport grains and minerals across its massive territory.
Biodiesel has matured into a $6 billion per year industry since Brazil's former President Luiz Inacio Lula da Silva encouraged family farmers to grow palm and castor plants for fuel a decade ago to spur rural development.
State-led oil company Petrobras last month announced a record sale of 166.7 million liters of biodiesel to be delivered in the fourth quarter of this year.
Vale, the world's second-largest mining firm and Brazil's biggest diesel consumer, is aiming to meet 20 percent of its diesel needs with biodiesel derived from palm oil by 2015, using plants it is building in the Amazon rain forest.
Sixty-two biodiesel producers make about 2.4 million tonnes of the fuel per year, 77 percent derived from soy oil, according to Brazilian oil regulator ANP and Rabobank International.
Neighboring Argentina, the world's top exporter of both soy oil and biodiesel, also produced 2.4 million tonnes of the fuel in 2011 but exported 1.7 million tonnes of it.
Brazil is expected to harvest a record 81 million tonnes of soybeans this year, surpassing U.S. production for the first time and easing market concerns over U.S. drought losses that pushed prices to record highs in September.
Most of Brazil's soy is shipped to China, but more may be crushed into soy oil if biodiesel demand continues to rise.
Local industry group APROBIO said Brazil's government will soon send legislation to Congress that would increase the biodiesel blend requirement in diesel from 5 percent to 7 percent, the same amount required in Argentina.
The blend requirement could gradually be raised even further in coming years, APROBIO President Julio Minelli said.
"The industry could meet a limit of 10 percent right now... installed production capacity is 6.9 billion liters, more than twice what is produced today," he told Reuters.
With that increasing capacity, producers want to break into the biodiesel export market and see opportunity in a recent trade spat.
Spain put up barriers against Argentine biodiesel imports in April, a week after Argentina said it would seize a majority stake in energy firm YPF . APROBIO's Minelli said Brazil could supply the Spanish market until the case is settled at the World Trade Organization.
"It would be a foot in the door for Brazilian biodiesel in Europe," he said.
A trader for Petrobras who declined to be named said the company, which serves as an intermediary between biodiesel producers and distributors, is interested in brokering sales of the fuel to Europe but had yet to clinch such a deal.
Cargill's de Angelis agreed, and biodiesel from the company's Tres Lagoas plant will be used internally.
"We don't see export as an option in the short term -- logistics and costs are not competitive with Argentina's product," he said.