Plantations - Higher biodiesel subsidy in Indonesia a game changer
Recommendation: Neutral
We are positive on the proposal to raise the subsidy for biodiesel in Indonesia by 333% to Rp5k per litre. The higher subsidy will significantly raise the CPO-biodiesel breakeven price level and revive biodiesel consumption. Indonesia plans to blend up to 3.41m kl of biodiesel in 2015. If successful, we believe it will boost CPO demand by 1.5m tonnes. This news is positive for CPO prices and biodiesel producers in Indonesia. We maintain our Neutral call and our top picks remain First Resources, AALI and SIMP.
What Happened
Jakarta Post reported that the Indonesian Energy and Resources Ministry has proposed that the subsidy for biodiesel be set at Rp5,000 (Rp5k) per litre, a 333% rise from Rp1,500 per litre proposed in the state budget earlier. Meanwhile, the bioethanol subsidy has been proposed at Rp3,000 per litre compared to the previously proposed Rp2,000 per litre. The bigger subsidy bill is needed because producers are experiencing high production costs while the benchmark price is declining as a consequence of the declining crude oil price, according to the ministry’s director general for renewable energy. In the proposed revised state budget, the rupiah exchange rate is set at Rp12,500 per US$ and the crude oil price assumption is at US$60 per barrel. The government has proposed that 3.41m kl of biodiesel be mixed in diesel and 0.117m kl bioethanol, which would mean total subsidies of Rp17.4tr (US$1.39bn). This is a significant increase from the Rp3.09tr previously planned for 1.58m kl of biodiesel. “The Rp17.4tr is standby money and the realisation will depend on blended volume,” Rida added. The proposal is pending approval by the House.
What We Think
We view this proposal as a potential game changer for the biodiesel industry in Indonesia, as the proposed higher biodiesel subsidy of Rp5k per litre will significantly raise the economic viability of producing and consuming biodiesel in Indonesia. This will encourage Pertamina, the biggest fuel distributor in Indonesia to hold more biodiesel tenders to secure the biodiesel supplies required to meet the government’s 10% biodiesel mandate. We estimate the Rp5k per litre subsidy equates to around US$350 per tonne of subsidy for biodiesel producers and fuel distributors. Assuming biodiesel producers get 70% of the proposed subsidy at the current crude oil price of US$55 per barrel, we roughly estimate the CPO-biodiesel breakeven price at RM2,300 per tonne, which is higher than the current CPO price of RM2,125 per tonne. As such, biodiesel producers will find it profitable to convert CPO to biodiesel up to the price of RM2,300 per tonne. If the government succeeds in achieving its target to blend 3.41m kl of biodiesel in 2015, it will be a huge boost to CPO demand which has been impacted by competition from other edible oils and low crude oil prices. We estimate the higher biodiesel usage could boost CPO consumption in Indonesia by 1.5m tonnes (5% of its CPO output).
What You Should Do
This proposed higher biodiesel subsidy is positive for biodiesel producers in Indonesia (Wilmar, First Resources), and CPO producers who will get to enjoy better CPO prices due to stronger demand for palm oil. Our current average CPO price forecast of RM2,460 per tonne for 2015, which has imputed around 800k tonnes rise in domestic biodiesel demand in Indonesia, is intact for now.
Source: CIMB Daybreak - 04 February 2015
Recommendation: Neutral
We are positive on the proposal to raise the subsidy for biodiesel in Indonesia by 333% to Rp5k per litre. The higher subsidy will significantly raise the CPO-biodiesel breakeven price level and revive biodiesel consumption. Indonesia plans to blend up to 3.41m kl of biodiesel in 2015. If successful, we believe it will boost CPO demand by 1.5m tonnes. This news is positive for CPO prices and biodiesel producers in Indonesia. We maintain our Neutral call and our top picks remain First Resources, AALI and SIMP.
What Happened
Jakarta Post reported that the Indonesian Energy and Resources Ministry has proposed that the subsidy for biodiesel be set at Rp5,000 (Rp5k) per litre, a 333% rise from Rp1,500 per litre proposed in the state budget earlier. Meanwhile, the bioethanol subsidy has been proposed at Rp3,000 per litre compared to the previously proposed Rp2,000 per litre. The bigger subsidy bill is needed because producers are experiencing high production costs while the benchmark price is declining as a consequence of the declining crude oil price, according to the ministry’s director general for renewable energy. In the proposed revised state budget, the rupiah exchange rate is set at Rp12,500 per US$ and the crude oil price assumption is at US$60 per barrel. The government has proposed that 3.41m kl of biodiesel be mixed in diesel and 0.117m kl bioethanol, which would mean total subsidies of Rp17.4tr (US$1.39bn). This is a significant increase from the Rp3.09tr previously planned for 1.58m kl of biodiesel. “The Rp17.4tr is standby money and the realisation will depend on blended volume,” Rida added. The proposal is pending approval by the House.
What We Think
We view this proposal as a potential game changer for the biodiesel industry in Indonesia, as the proposed higher biodiesel subsidy of Rp5k per litre will significantly raise the economic viability of producing and consuming biodiesel in Indonesia. This will encourage Pertamina, the biggest fuel distributor in Indonesia to hold more biodiesel tenders to secure the biodiesel supplies required to meet the government’s 10% biodiesel mandate. We estimate the Rp5k per litre subsidy equates to around US$350 per tonne of subsidy for biodiesel producers and fuel distributors. Assuming biodiesel producers get 70% of the proposed subsidy at the current crude oil price of US$55 per barrel, we roughly estimate the CPO-biodiesel breakeven price at RM2,300 per tonne, which is higher than the current CPO price of RM2,125 per tonne. As such, biodiesel producers will find it profitable to convert CPO to biodiesel up to the price of RM2,300 per tonne. If the government succeeds in achieving its target to blend 3.41m kl of biodiesel in 2015, it will be a huge boost to CPO demand which has been impacted by competition from other edible oils and low crude oil prices. We estimate the higher biodiesel usage could boost CPO consumption in Indonesia by 1.5m tonnes (5% of its CPO output).
What You Should Do
This proposed higher biodiesel subsidy is positive for biodiesel producers in Indonesia (Wilmar, First Resources), and CPO producers who will get to enjoy better CPO prices due to stronger demand for palm oil. Our current average CPO price forecast of RM2,460 per tonne for 2015, which has imputed around 800k tonnes rise in domestic biodiesel demand in Indonesia, is intact for now.
Source: CIMB Daybreak - 04 February 2015
