Crude Price Impacts Southeast Asia's Biodiesel Plans

Indonesia, Malaysia plan to use more palm oil to make biofuel. Industry, analysts sceptical of targets.

The world's top palm oil producers Indonesia and Malaysia may have to curb plans to channel more of the commodity into biodiesel as tumbling crude oil prices render the edible oil twice as expensive as its fossil fuel alternative.

Indonesia expects to raise the minimum bio content of gasoil in the country by a quarter to 20 percent in 2016, while Malaysia has said it plans a 10-percent blend, up from the 7-percent targetted in 2015.

They want to cut vegetable oil stockpiles that have swollen to millions of tonnes as record global output meets faltering demand, as well as reducing emissions that damage the environment.

But industry officials and analysts said they were sceptical about both countries' plans, with crude oil prices plunging to 12-year lows, while palm oil gained 34 percent in the last quarter of 2015.

Indonesian government officials told Reuters they stood by their blending plan, while Malaysia's plantations ministry declined to comment.

"I think both Malaysia and Indonesia will have to review their biodiesel mandates since both countries are also oil and gas producers and exporters," said M.R. Chandran, a veteran palm oil industry official who works as a consultant in Kuala Lumpur.

"It doesn't make economic sense the way oil prices are falling, gasoil now costs just half of palm oil."

A slowdown in a shift towards biofuels in Southeast Asia would likely pressure benchmark palm oil futures, one of the best performing commodities in 2015, as well as denting efforts to rein in carbon emissions in the wake of a landmark global deal to combat climate change reached in Paris in December.

GROWING GAP
Analysts said the growing gap between palm oil and crude prices has ramped up the amount the Indonesian and Malaysian governments would have to pay in subsidies to blenders as part of their schemes to move towards biofuels. Palm was quoted at about $550 a tonne on Thursday, with gasoil selling at around $283 a tonne.

The new targets would require subsidies of more than $900 million in Indonesia and $260 million in Malaysia at current market prices, according to Reuters calculations based on the price spread between the two products.

Indonesian officials said most of the subsidies in their country could be funded by a $50 a tonne tax on palm oil exports, but some in the industry said that was unrealistic.

"The funds wouldn't be sufficient to cover subsidies for the targetted volume," said Fadhil Hasan, executive director at the Indonesian Palm Oil Association.

"Subsidies are an issue for both Malaysia and Indonesia as the economic growth forecast is weak and currencies are under pressure," Chandran said.

Analysts expect Indonesia to at best achieve a 10-percent mandate in 2016, while Malaysia's blending level will likely fall below its 2015 goal of 7 percent.

But Indonesia's government said it would meet its 20-percent blending target, dubbed 'B20'.

"The most important thing is that government's policy on B20 programme is going to be implemented," said Rida Mulyana, director general of renewable energy at Indonesia's energy ministry.

The new biodiesel mandates are aimed at using up about 3.4 million tonnes of palm oil stocks in Indonesia and close to 1 million tonnes in Malaysia.

Both countries are producing at just a fraction of their installed biodiesel capacity. Malaysia has set up plants to make 2.5 million tonnes of palm methyl ester or biodiesel a year and Indonesia can produce 4-5 million tonnes.

Reporting by Naveen Thukral