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Asian biodiesel market stays subdued as POGO hits record high, eroding blending demand

Singapore — The crude palm oil/gasoil spread or POGO has been hovering at record highs this month amid weak gasoil values with crude dropping to 11-year lows and CPO remaining supported by higher prices of comparative edible oil like soya, dampening sentiment of discretionary blenders, sources said Thursday.

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The POGO spread -- which reflects the value of the first-month crude palm oil futures contract on the Bursa Malaysia minus the value of the front-month ICE gasoil futures at 4:30 pm Singapore time -- was assessed at $200.50/mt on Tuesday, the highest level since Platts launched the quote on February 2, 2015, but edged down to $197.05/mt at Wednesday's Asian market close.

The spread was last seen at its highest on December 23 at $198.28/mt, data showed.

Typically, a POGO spread of minus $120/mt or lower is attractive for producers and buyers of biodiesel as it means CPO is cheaper than gasoil and so would PME be.



CPO, RBD, or refined, bleached and deodorized palm oil, and RBD palm olein are feedstock for PME.

But with the POGO spread widening into positive territory, the cost of producing PME or biodiesel exceeds the price of gasoil, meaning discretionary blending, which relies on biodiesel being cheaper than gasoil, becomes less viable for new biodiesel production.

"Consumers would not want to pay for a higher biodiesel cost when the alternatives are much more economical, especially in the current weak macroeconomic situation," said a Singapore-based trader.

EYES ON MALAYSIAN B10 MANDATE

At current POGO levels, "it is too challenging for the palm methyl ester export market ... and we can only hope for a full implementation of B10 (10% PME and 90% diesel) mandate in April 2016 [to boost the market]," said an integrated Malaysian biodiesel producer.

According to U R Unnithan, Deputy President of Malaysian Biodiesel, the implementation of the B10 mandate would translate to demand for 1 million mt/year of biodiesel, or around 39% capacity utilization out of 2.6 million mt installed capacity in the country.

The Malaysian government initially planned to launch the B10 mandate in October, after delaying it from July, but concerns raised by automotive associations about pushed the plan back to April.

In June this year, some carmakers had voiced concern on B10 implementation, saying they were unable to guarantee engine performance for vehicles running on fuel with higher biodiesel content, Platts has reported.

"Malaysian Palm Oil Board is currently testing B10 at Cameron Highlands, jointly with the Japanese Automotive Association now, and the results are expected to be out by March 2016. If they can get the results earlier, the implementation can be earlier," said one biodiesel producer.

--Alexis Gan, alexis.gan@platts.com
--Edited by Haripriya Banerjee, haripriya.banerjee@platts.com