Indonesia mulls raising the biodiesel mix
? Indonesia is considering plans to raise biodiesel mandate to 35% from 30%.
? We estimate that this could raise CPO demand by 1.5-1.6m tonnes/annum.
? However, it is unlikely to have a significant impact on near-term CPO price as
it may take time to implement the higher biodiesel mandates.
Indonesia considers raising biodiesel mix to 35% from 30%
Indonesia’s Deputy at Coordinating Ministry, Septian Hario Seto, said that Indonesia is
considering a plan to raise its biodiesel mandate to help lower fuel import costs and absorb
overflowing palm oil stockpiles. He added that the government plans to raise the biodiesel
mandate to 35% from 30%. The plan is being discussed by related ministries, biodiesel
producers and automakers. The government is preparing to road test vehicles using 40%
palm-biodiesel fuel at the end of Jul, which was delayed from 2021 due to falling fuel costs
and high palm oil prices at that time.
Potential impact on palm oil demand in Indonesia
If the government carries out the plan to raise the biodiesel mandate to 35% from 30%, we
estimate that this could raise Indonesia’s annual biodiesel demand to 11.8m kls from the
current 10.1m kls annual target, assuming the new mandates are applied to all sectors.
This implies potential incremental palm oil usage of 1.5-1.6m tonnes for biodiesel purposes.
The news is positive in the medium term for CPO prices as higher usage of palm oil for
biodiesel will boost demand for palm oil. However, we believe it is unlikely to significantly
alter the current palm oil supply glut situation in Indonesia as it will take time for Indonesia
to implement the higher biodiesel mandates. In 5M22, Indonesia consumed 3.75m kls of
palm-based biodiesel which is broadly in line with its full-year target of 10.1m kls.
Special US$200/tonne export tax and high stocks pressure price
We attribute the recent 40% decline in CPO price in Indonesia to Rp8,443/kg
(RM2,512/tonne) as at 28 Jul 2022, from Rp14,090/kg (RM4,216/tonne) prior to the lifting
of the export ban as at 23 May 2022, to several factors: (1) fall in international CPO price
due to concerns over higher export supplies from Indonesia as well as rising risk of a US
recession, (2) implementation of the additional special export tax of US$200/tonne for
Domestic Market Obligation (DMO) exemption, which appears to be partially reflected in
Indonesia’s CPO price. The latest CPO price in Indonesia of RM2,512/tonne represents a
discount of RM2,580/tonne (US$587/tonne) from Malaysia’s CPO price of RM5,092/tonne.
The discount is higher than the current total export tax and levy of US$488/tonne in
Indonesia for CPO, which we believe is to reflect the special export tax or DMO obligation
plus current high inventory in Indonesia; and (3) slow issuance of export permits since the
export ban (28 Apr to 23 May) was lifted. As at 28 Jun, the government has issued permits
for a total of 1.89m tonnes of palm oil exports. Of this, 1.08m tonnes were based on
domestic market obligations, while 806,000 tonnes were export permits exempted from
DMO. The export permits issued since the export ban on 28 Apr of 1.89m tonnes is low
relative to Indonesia’s 2021 average monthly palm oil exports volume of 2.85m tonnes.
Potential impact on palm oil players
We believe the higher biodiesel mandate in Indonesia will be medium-term positive for
Indonesian biodiesel producers like Wilmar, Golden Agri and First Resources as it will allow
them to expand their revenue and earnings base. However, we do not expect the earnings
impact to be significant. The recent decline in spot CPO price in Malaysia of 26% since the
export ban was lifted is due partly to concerns over higher export supplies from Indonesia.
This has improved palm oil price competitiveness against soybean oil and gas oil, which
should boost demand. We maintain our average CPO price forecasts of
RM5,600/RM3,800/tonne for 2022/2023F, and Neutral rating on the sector as valuations
are undemanding following the recent price corrections. Wilmar and KL Kepong are our
key picks in the sector.