Plantations - Indonesia cuts allocation for biodiesel subsidy
Recommendation: Neutral
In agreeing to the Rp4,000/litre biodiesel subsidy, the House of Representative Commission VII revealed that it has cut the volume of biodiesel it is willing to subsidise to 1.7m kl from an earlier proposal of 3.4m kl. This is negative as the non-subsidised fuel market will continue to find it uneconomical to blend the mandated biodiesel in its fuel, unless it passes on the higher costs to consumers. As such, the government would need to step up enforcement to achieve its 2015 target of 3.4m kl. Our estimate shows that Pertamina will only need to secure around 2.1m kl of biodiesel to meet the 3.4m kl target, as it may have 1.3m kl of biodiesel carried forward from 2014’s tender process. Maintain Neutral. Top picks are First Res, AALI and SIMP.
What Happened
The Jakarta Post reported that in the deliberation on the proposed revision to the 2015 State Budget, the House of Representative Commission VII overseeing energy, has cut the biodiesel allocation to Rp6.8tr (US$544m), from the earlier proposal by the Energy and Mineral Resources Ministry of Rp17tr (US$1.4bn). The lower budget allocation reflects the lowered biodiesel subsidy of Rp4,000 per litre from Rp5,000 per litre. On top of this, the volume of subsidised diesel is lowered to 1.7m kilolitres (kl) from the earlier proposed 3.41m kl. (Fig 1) This is because the subsidy will only be given to the public through the public service obligations scheme (PSO or the subsidised transport diesel). The volume of the biofuel blended with ethanol is fixed at 107,000kls.
What We Think
We view the House of Representative’s willingness to provide a subsidy to only 1.7m kl of biodiesel, or the subsidised fuel sector, as a setback. This is because it could mean a slower increase in Indonesia’s biodiesel demand from last year’s usage of 1.2m kl (PSO market) and 1.8m kl (overall). (Fig 4) The non-subsidised diesel sectors in Indonesia will continue to find it economically unviable to blend 10% biodiesel into their current diesel consumption to meet the mandates without subsidies. As such, the only way for the biodiesel target of 3.41m kl to be achieved in the current environment is for the Indonesian government to step up enforcement efforts on the mandates by introducing stiff penalties. This will ensure fuel distributors of non-subsidised diesel meet the mandates and pass on the higher costs in their fuel mix to consumers. It is unclear at this juncture how strictly these mandates will be enforced in the non-subsidised fuel sectors. In 2014, Pertamina secured 3.1m kl of biodiesel through tenders for 2014-15 usage. (Fig 2) Assuming it used up 1.8m kls biodiesel in 2014, it still has 1.3m kls biodiesel brought forward for 2015. This means Pertamina needs to tender for 400,000kls of biodiesel to meet requirement for the subsidised sector of 1.7m kl and 2.1m kl in order to meet the full target of 3.4m kls.
What You Should Do
We maintain our 2015 CPO price forecast of RM2,460 per tonne, which assumes an 800k tonnes increment in Indonesia’s biodiesel consumption. Our view is that the proposed higher biodiesel subsidy and pricing formula is positive, but the actual amount of biodiesel that Indonesia will ultimately consume in 2015 as a result will very much depend on enforcement and CPO prices. According to Chairman of APROBI, every 1m tonne increase in Indonesia biodiesel demand could raise CPO prices by US$98-100 per tonne.
Source: CIMB Daybreak - 09 February 2015
Recommendation: Neutral
In agreeing to the Rp4,000/litre biodiesel subsidy, the House of Representative Commission VII revealed that it has cut the volume of biodiesel it is willing to subsidise to 1.7m kl from an earlier proposal of 3.4m kl. This is negative as the non-subsidised fuel market will continue to find it uneconomical to blend the mandated biodiesel in its fuel, unless it passes on the higher costs to consumers. As such, the government would need to step up enforcement to achieve its 2015 target of 3.4m kl. Our estimate shows that Pertamina will only need to secure around 2.1m kl of biodiesel to meet the 3.4m kl target, as it may have 1.3m kl of biodiesel carried forward from 2014’s tender process. Maintain Neutral. Top picks are First Res, AALI and SIMP.
What Happened
The Jakarta Post reported that in the deliberation on the proposed revision to the 2015 State Budget, the House of Representative Commission VII overseeing energy, has cut the biodiesel allocation to Rp6.8tr (US$544m), from the earlier proposal by the Energy and Mineral Resources Ministry of Rp17tr (US$1.4bn). The lower budget allocation reflects the lowered biodiesel subsidy of Rp4,000 per litre from Rp5,000 per litre. On top of this, the volume of subsidised diesel is lowered to 1.7m kilolitres (kl) from the earlier proposed 3.41m kl. (Fig 1) This is because the subsidy will only be given to the public through the public service obligations scheme (PSO or the subsidised transport diesel). The volume of the biofuel blended with ethanol is fixed at 107,000kls.
What We Think
We view the House of Representative’s willingness to provide a subsidy to only 1.7m kl of biodiesel, or the subsidised fuel sector, as a setback. This is because it could mean a slower increase in Indonesia’s biodiesel demand from last year’s usage of 1.2m kl (PSO market) and 1.8m kl (overall). (Fig 4) The non-subsidised diesel sectors in Indonesia will continue to find it economically unviable to blend 10% biodiesel into their current diesel consumption to meet the mandates without subsidies. As such, the only way for the biodiesel target of 3.41m kl to be achieved in the current environment is for the Indonesian government to step up enforcement efforts on the mandates by introducing stiff penalties. This will ensure fuel distributors of non-subsidised diesel meet the mandates and pass on the higher costs in their fuel mix to consumers. It is unclear at this juncture how strictly these mandates will be enforced in the non-subsidised fuel sectors. In 2014, Pertamina secured 3.1m kl of biodiesel through tenders for 2014-15 usage. (Fig 2) Assuming it used up 1.8m kls biodiesel in 2014, it still has 1.3m kls biodiesel brought forward for 2015. This means Pertamina needs to tender for 400,000kls of biodiesel to meet requirement for the subsidised sector of 1.7m kl and 2.1m kl in order to meet the full target of 3.4m kls.
What You Should Do
We maintain our 2015 CPO price forecast of RM2,460 per tonne, which assumes an 800k tonnes increment in Indonesia’s biodiesel consumption. Our view is that the proposed higher biodiesel subsidy and pricing formula is positive, but the actual amount of biodiesel that Indonesia will ultimately consume in 2015 as a result will very much depend on enforcement and CPO prices. According to Chairman of APROBI, every 1m tonne increase in Indonesia biodiesel demand could raise CPO prices by US$98-100 per tonne.
Source: CIMB Daybreak - 09 February 2015
