Indonesia raising biodiesel mandate to 35%
? Indonesia to implement B35 from 20 July, to raise domestic palm oil usage.
? This will boost sentiment but may not resolve the current high stock in the near term as additional absorption rate of CPO is at 134k tonnes/month.
? We think Indonesia is likely to introduce more policies to boost domestic FFB price to at least Rp1,600/kg and we expect export policies to get friendlier.
Indonesia to implement B35 biodiesel, effective 20 Jul 2022
? Senior Energy Ministry official Dadan Kusdiana said late Friday that Indonesia plans to increase the content of palm oil-based fuel (biodiesel) in its fuel to 35%, also known as B35, from 30%, effective 20 Jul 2022. This policy is aimed at reducing palm oil inventories in Indonesia – which have been building up following a three-week export ban from 28 Apr to 23 May 2022. Since the lifting of the export ban, CPO price in Indonesia has fallen by 48% to Rp/7,288kg as at 8 Jul. Dadan said the increase would create additional demand for 727,804kls of the palm oil fuel this year, taking the full year consumption to 10.88mkls. Indonesia’s biodiesel consumption from Jan-July 2022 was estimated at 5.78mkls. He added that the Energy Ministry would also launch a road test for B40 (or 40% biodiesel blend).
Raising biodiesel usage one of the measures to raise prices
? The news to implement B35 does not come as a surprise to us. This is because Senior Minister Luhut Pandjaitan had on 2 July mentioned that the government is considering increasing mandatory levels of biodiesel in fuel mixes to B35 or B40 to prop up prices for farmers. The government has also pushed through other policies to reduce inventories in Indonesia which include increasing the export rights multiplication factor to 7x of their Domestic Market Obligation (7x DMO) starting 1 Jul 2021 from 5x. This is aimed at providing better exports visibility to exporters to shore up exports and free up storage tanks in Indonesia.
Lowering palm oil export levy could be the next move
? It was reported that other efforts authorities are considering, to bring improve domestic palm oil prices, include lowering the palm oil export levy to spur exports and asking palm oil producers to buy fresh fruit bunches from farmers at a minimum price of Rp1,600/kg. It was reported that the price of FFB in several areas of oil palm plantations in Indonesia was below Rp1,000/kg as the storage tanks are full. According to Indonesian Palm Oil Association (GAPKI), exports of palm oil have been slow due partly to limited availability of ships.
? Indonesia is now at risk of losing palm oil supplies in the coming months, as the FFB price has fallen behind the cost of production of smallholders, reported to be as high as Rp1,800/kg and storage tanks are full. The policy to implement B35 will help to raise domestic palm oil usage, reduce stocks and improve domestic prices sentiment. However, it will take time for the policy to effectively lower stocks as we estimate the additional absorption rate of CPO is at 134k tonnes/month.
? To put things in perspective, we estimate palm oil stocks in Indonesia to be at 8m8.5m tonnes as at end-Jun vs. end-Apr 2022 (beginning of export ban) of 6.1m tonnes.
? We view the plans to reduce export levy as positive for Indonesian CPO prices in the medium term as it reduces the tax burden, which appears to be borne by Indonesian farmers currently. The combined export tax and levy in Jul stood at US$488/tonne (before adding the special US$200/tonne tax under the “flush out” programme). This is at the maximum threshold level and based on reference price of US$1,688/tonne for Jul vs. spot CPO price in Rotterdam of US$1,220/tonne as at 7 Jul 2022.
? We maintained Neutral sector rating. Share prices of planters have reacted negatively to the falling CPO price. We see scope for CPO price to rebound as Indonesia’s more aggressive policies to lower stocks could led to future unintended shortfalls in supply. Our top picks in region are Wilmar, KLK and DSNG.