Plantations - Indonesia to raise biodiesel blend to 15%
Recommendation: Neutral
We are surprised by Indonesia’s plan to raise the country’s biodiesel blend from 10% to 15% as early as next week. This is a positive development for CPO prices if the mandate is successfully executed as it would boost demand for palm oil. We estimate that this policy could potentially raise CPO demand for domestic biodiesel usage in Indonesia by 322% to 4.8m tonnes per annum (or 16% of the country’s total output). However, there are three key challenges, namely: (1) the economic viability of biodiesel vs. crude oil; (2) the lack of enforcement; and (3) infrastructure and logistical issues. Until we see more concrete steps taken to achieve this biodiesel mandate, we will keep our average 2015 CPO price forecast at RM2,460 per tonne. Our Neutral sector call is maintained.
What Happened
Indonesia plans to increase the blending of palm oil with diesel this year to cut the cost of fossil fuel imports and shore up palm oil prices. The government plans to raise the blending rate from 10% to 15% this year, and 20% in 2016, Coordinating Minister for Economic Affairs Sofyan Djalil was reported as saying Friday. The Energy and Mineral Resources Ministry may announce the higher blending rules next week, to be effective immediately, Djalil said. The increased use of palm oil in biodiesel may reduce the supply of the vegetable oil and support prices, he said. President Joko Widodo’s government, which more than doubled its subsidy for palm biofuels last month, is seeking to contain a persistent current account deficit and revive flagging economic growth.
What We Think
This news is a surprise to us. Our earlier understanding was that Indonesia plans to hike the biodiesel blend from 10% to 20% only in 2016. However, the change in stance may have been due to the recent weakness in the rupiah which plunged to around IDR13,200 to the US$. Last Thurs, Finance Minister Bambang Brodjonegoro unveiled eight steps that the government plans to take to reduce its current account deficit, with one of them being expanding the use of the biodiesel blend to cut the cost of imported crude oil. The government’s plans to raise biodiesel blend could come into force as early as next week and will be positive for CPO prices if it is successfully executed. This is because the higher blend will boost palm oil usage for biodiesel consumption. We estimate that a 15% blend could potentially raise Indonesia’s biodiesel consumption by to 5.5m kl (4.8m tonnes) per annum, from 1.8m kl in 2014 (1.57m tonnes). This could potentially raise Indonesia’s CPO demand for biodiesel purposes by 3.2m tonnes or around 11% of the country’s CPO production. However, the key challenges are: (1) it is currently uneconomical to convert CPO into biodiesel without government subsidies; (2) there is currently no penalty for those not meeting the biodiesel mandates, while enforcement is lacking; and (3) in some areas, there are infrastructure and logistical issues that need to be sorted out before the higher blend can be implemented.
What You Should Do
We are positive on CPO prices following this development, but our price forecasts will remain unchanged until we see concrete steps taken by the government to forcefully implement the mandate. As such, we maintain our average CPO price forecast at RM2,460 per tonne for this year, and Neutral rating on the regional plantation sector. We advise investors to be selective in their picks in this sector. We like First Resources, Astra Agro and SIMP.
Source: CIMB Daybreak - 13 March 2015
Recommendation: Neutral
We are surprised by Indonesia’s plan to raise the country’s biodiesel blend from 10% to 15% as early as next week. This is a positive development for CPO prices if the mandate is successfully executed as it would boost demand for palm oil. We estimate that this policy could potentially raise CPO demand for domestic biodiesel usage in Indonesia by 322% to 4.8m tonnes per annum (or 16% of the country’s total output). However, there are three key challenges, namely: (1) the economic viability of biodiesel vs. crude oil; (2) the lack of enforcement; and (3) infrastructure and logistical issues. Until we see more concrete steps taken to achieve this biodiesel mandate, we will keep our average 2015 CPO price forecast at RM2,460 per tonne. Our Neutral sector call is maintained.
What Happened
Indonesia plans to increase the blending of palm oil with diesel this year to cut the cost of fossil fuel imports and shore up palm oil prices. The government plans to raise the blending rate from 10% to 15% this year, and 20% in 2016, Coordinating Minister for Economic Affairs Sofyan Djalil was reported as saying Friday. The Energy and Mineral Resources Ministry may announce the higher blending rules next week, to be effective immediately, Djalil said. The increased use of palm oil in biodiesel may reduce the supply of the vegetable oil and support prices, he said. President Joko Widodo’s government, which more than doubled its subsidy for palm biofuels last month, is seeking to contain a persistent current account deficit and revive flagging economic growth.
What We Think
This news is a surprise to us. Our earlier understanding was that Indonesia plans to hike the biodiesel blend from 10% to 20% only in 2016. However, the change in stance may have been due to the recent weakness in the rupiah which plunged to around IDR13,200 to the US$. Last Thurs, Finance Minister Bambang Brodjonegoro unveiled eight steps that the government plans to take to reduce its current account deficit, with one of them being expanding the use of the biodiesel blend to cut the cost of imported crude oil. The government’s plans to raise biodiesel blend could come into force as early as next week and will be positive for CPO prices if it is successfully executed. This is because the higher blend will boost palm oil usage for biodiesel consumption. We estimate that a 15% blend could potentially raise Indonesia’s biodiesel consumption by to 5.5m kl (4.8m tonnes) per annum, from 1.8m kl in 2014 (1.57m tonnes). This could potentially raise Indonesia’s CPO demand for biodiesel purposes by 3.2m tonnes or around 11% of the country’s CPO production. However, the key challenges are: (1) it is currently uneconomical to convert CPO into biodiesel without government subsidies; (2) there is currently no penalty for those not meeting the biodiesel mandates, while enforcement is lacking; and (3) in some areas, there are infrastructure and logistical issues that need to be sorted out before the higher blend can be implemented.
What You Should Do
We are positive on CPO prices following this development, but our price forecasts will remain unchanged until we see concrete steps taken by the government to forcefully implement the mandate. As such, we maintain our average CPO price forecast at RM2,460 per tonne for this year, and Neutral rating on the regional plantation sector. We advise investors to be selective in their picks in this sector. We like First Resources, Astra Agro and SIMP.
Source: CIMB Daybreak - 13 March 2015
