Palm-based B30 biodiesel mandate to continue with Indonesian government backing

Singapore — Seeking to end the Indonesian B30 biodiesel blending mandate funding issue, the country's government had unveiled a $186 million, or Rupiah $2.78 trillion, injection into the fund as well as hiked its palm oil export levy by $5/mt to $55/mt in May, Finance Minister Sri Mulyani said Monday, according to local news reports.

Previously, the Indonesian CPO export levy was pegged at $50/mt in May while Malaysia will reduce its CPO export duty to 0% in June from 4.5% in May.

"$51 million will be funded by businesses through the increase in the export levy while the government will contribute $186 million," the minister said.

Crude oil's plunge in the first quarter of 2020 saw many questioning the continued viability of the B30 blending mandate, a diesel blend with 30% palm-based biodiesel launched by Indonesia in January.

Meanwhile, the palm oil/gasoil spread, or POGO, rose to $213.02/mt Monday, from $139.74/mt January 2, according to S&P Global Platts data, stretching the ability of the Indonesian Oil Palm Estate Fund (BPDP-KS) to subsidize mandatory blending.

BPDP-KS collects export levies to fund itself and subsidize biodiesel blending when palm-based biodiesel is priced above the cost of diesel. An Indonesia-based biodiesel producer had estimated the government to be bleeding between $80-$100 million/month, as the window for discretionary blending closed in September-October 2019.

Another palm producer believed the money collected by BPDP-KS to be essentially "wiped out."

A Singapore-based analyst, though, was expecting higher government subsidies. "Based on an average spread of Rupiah 2,600/liter from January to April 2020 and 2.6 million kl of FAME consumption, total subsidy should be more than $450 million," he said.

"The move by the government to support blending show how determined the government is for the B30 blending mandate to succeed," said Sathia Varqa, owner and cofounder of Singapore based Palm Oil Analytics.

Indonesian biodiesel producers had reported a fall of 15-20% month on month in orders for the B30 blending mandate with the coronavirus-prompted lockdown in the Jakarta area crippling diesel demand.

At the same time, "the hike in export levy in Indonesia and reduction in CPO export duty in Malaysia in June will make Malaysia's CPO cheaper than Indonesian products, and with Malaysia patching up relations with India, palm exports between the two countries could resume," Sathia Varqa added.

The expected difference in CPO prices between the two countries due to tax structure is expected by Anilkumar Bagani, Commodity Research Head at Sunvin Group, to initially increase the spread among Malaysian and Indonesian palm oil offerings but will be narrowed down later. "The Indonesian government to support B30 is a welcome move for the palm oil market as it will bring much needed confidence on palm oil demand from biodiesel front," he said.

United Overseas Bank showed in a note May 8 that Indonesia foreign Exchange Reserves were at $127.9 billion at the end of April.

"Going forward, CPO production in Malaysia and Indonesia will be flat month on month in May and down 0-5% in June," Sathia Varqa added.