Plantations - Indonesia rolls out new biodiesel formula to lower prices
Recommendation: Neutral
Jakarta Post reported that the Indonesian government has introduced a new pricing formula for biodiesel which lowers the cost of converting biodiesel from US$188 per tonne to US$125 per tonne. We believe that the aim of the change is to reduce the biodiesel price to improve the economic viability of replacing 15% of diesel with biodiesel under the new mandate. The flurry of changes in policies linked to biodiesel in recent days demonstrates the commitment of various stakeholders and government to meeting the 15% biodiesel target amid challenges in implementation. We maintain our Neutral rating and keep First Res, AALI and SIMP as our top picks.
What Happened
According to Jakarta Post, the Energy and Mineral Resources Ministry has introduced a new formula aimed at lowering the price of biodiesel purchased by distributors. Under the new formula, the biodiesel index price will be calculated based on the crude palm oil (CPO) base price plus US$125 per tonne multiplied by 870kg per cubic metre. The added US$125 per tonne is the cost of converting CPO into fatty acid methyl ester (FAME) or biodiesel. This is lower than the US$188 cost per tonne under the previous formula. “The government had previously planned to subsidise biodiesel to protect the biodiesel industry against declining crude oil price. However, the recent decision to increase the biodiesel blend from 10% to 15% will require additional funds for subsidies which the state budget cannot afford. Passing on the price gap between fossil and non-fossil fuel to diesel users is not an option taken by the government”, said Energy and Mineral Resources Minister Sudirman Said. “We are happy that business players are willing to share the pain of the price gap to create a market that increases the value of future economic activity,” Sudirman stated during a speech at the launching of the biodiesel base price index yesterday.
What We Think
The new biodiesel pricing formula is likely to replace the current formula which came into effect on 2 March 2015. The key adjustment in the new formula was the US$63 or 34% reduction in the cost of converting CPO into biodiesel to US$125 (RM459) per tonne. The rationale for this move is to lower the Indonesian biodiesel price by getting the biodiesel producers to accept a lower processing margin of US$125 per tonne for biodiesel. The medium-term upside for the biodiesel producers is that the recent proposals will help raise biodiesel consumption in the country to achieve the government biodiesel mandates of 15% or around 5.3m kl of biofuel to be blended into diesel. This equates to CPO usage of 4.8m tonnes per annum. Wilmar and First Resources own biodiesel plants in Indonesia.
What You Should Do
The recent proposed changes in biodiesel policy in Indonesia demonstrate the challenges in implementing the biodiesel mandate as well as the commitment of the government and various stakeholders to the policy. Both palm oil and biodiesel producers are required to made short-term sacrifices under the latest proposed policy changes for potential medium-term gains through higher selling prices for CPO producers and larger biodiesel sales volumes in the case of biodiesel producers. These proposals are likely to be short-term negative for palm oil producers in Indonesia until there is evidence of higher biodiesel offtakes in the country. We maintain our Neutral rating.
Source: CIMB Daybreak - 25 March 2015
Recommendation: Neutral
Jakarta Post reported that the Indonesian government has introduced a new pricing formula for biodiesel which lowers the cost of converting biodiesel from US$188 per tonne to US$125 per tonne. We believe that the aim of the change is to reduce the biodiesel price to improve the economic viability of replacing 15% of diesel with biodiesel under the new mandate. The flurry of changes in policies linked to biodiesel in recent days demonstrates the commitment of various stakeholders and government to meeting the 15% biodiesel target amid challenges in implementation. We maintain our Neutral rating and keep First Res, AALI and SIMP as our top picks.
What Happened
According to Jakarta Post, the Energy and Mineral Resources Ministry has introduced a new formula aimed at lowering the price of biodiesel purchased by distributors. Under the new formula, the biodiesel index price will be calculated based on the crude palm oil (CPO) base price plus US$125 per tonne multiplied by 870kg per cubic metre. The added US$125 per tonne is the cost of converting CPO into fatty acid methyl ester (FAME) or biodiesel. This is lower than the US$188 cost per tonne under the previous formula. “The government had previously planned to subsidise biodiesel to protect the biodiesel industry against declining crude oil price. However, the recent decision to increase the biodiesel blend from 10% to 15% will require additional funds for subsidies which the state budget cannot afford. Passing on the price gap between fossil and non-fossil fuel to diesel users is not an option taken by the government”, said Energy and Mineral Resources Minister Sudirman Said. “We are happy that business players are willing to share the pain of the price gap to create a market that increases the value of future economic activity,” Sudirman stated during a speech at the launching of the biodiesel base price index yesterday.
What We Think
The new biodiesel pricing formula is likely to replace the current formula which came into effect on 2 March 2015. The key adjustment in the new formula was the US$63 or 34% reduction in the cost of converting CPO into biodiesel to US$125 (RM459) per tonne. The rationale for this move is to lower the Indonesian biodiesel price by getting the biodiesel producers to accept a lower processing margin of US$125 per tonne for biodiesel. The medium-term upside for the biodiesel producers is that the recent proposals will help raise biodiesel consumption in the country to achieve the government biodiesel mandates of 15% or around 5.3m kl of biofuel to be blended into diesel. This equates to CPO usage of 4.8m tonnes per annum. Wilmar and First Resources own biodiesel plants in Indonesia.
What You Should Do
The recent proposed changes in biodiesel policy in Indonesia demonstrate the challenges in implementing the biodiesel mandate as well as the commitment of the government and various stakeholders to the policy. Both palm oil and biodiesel producers are required to made short-term sacrifices under the latest proposed policy changes for potential medium-term gains through higher selling prices for CPO producers and larger biodiesel sales volumes in the case of biodiesel producers. These proposals are likely to be short-term negative for palm oil producers in Indonesia until there is evidence of higher biodiesel offtakes in the country. We maintain our Neutral rating.
Source: CIMB Daybreak - 25 March 2015
