KUALA LUMPUR: Indonesia should not push its Biodiesel Mandate – a move targeted to increase the utilisation of palm oil – too hard and squeeze the market, as it might lose its appeal to other developing nations, cautioned leading vegetable oils analyst Dorab Mistry.
Also known as the B20 programme, Mistry said at the Palm and Lauric Oils Conference and Exhibition 2016 that the initiative, although late, had a good start than what he had anticipated.
“But Indonesia must remember that the greatest attraction of palm oil is its availability and attractive price.
“As producers, Indonesia’s friends are the developing countries such as India, Pakistan, Bangladesh and Africa,” noted Mistry, adding that the poor nations loved palm oil and consumed it, while the rich nations lobbied against it.
Under the Biodiesel Mandate, Indonesia plans to increase the blending rate between palm oil and diesel at 20% this year, up from 15% last year. This increases the utilisation of the commodity and reduces the country’s imports of diesel.
Mistry felt that the biodiesel programme only did well due to the effects of the El Nino.
But what would eventually determine the price, going forward, was production, he said, adding that at present, the programme was running at 200,000 tonnes of palm oil.
Mistry, who is known for not mincing his words and speaking freely, felt that France’s move to impose a tax of 300 euros per tonne on CPO and its derivatives beginning 2017 followed by an increase to 900 euros per tonne by 2020 was irrational.
“However, I hope the council set up between Malaysia and Indonesia would temper the consumption of palm and biodiesel to avoid the market from being squeezed too much by the second half of this year,” he said, adding that the programme should be flexible.
Despite the global headwinds, he affirmed that the vegetable oils market had weathered the conditions extremely well, with prices recovering at remunerative levels.
On palm oil’s biggest competitor soy bean, Mistry said demand for the produce had been very strong.
“Soy bean oil prices have also held up quite well despite the less-than-impressive demand because it was priced well in the market,” he said.
While India has been absorbing soy bean oil and is partly responsible for keeping the produce afloat, Mistry expects soy bean oil to continue extracting market share from sunflower oil and some of palm oil, but only if the gap between palm oil and soy bean oil narrowed.
The near-term outlook for the next four months would be better for palm oil than soy bean oil, Mistry said.
Commenting on the inventory levels, Mistry said stocks were declining at a pace the industry had rarely seen before, and the market had been somewhat complacent about what was going on on the production front.
“This anaemic run is likely to continue until June when the biological low cycle, which started in November, is expected to finish at the earliest in June or possibly even July.
“Till then, this market will be another shadow of strained production,” he noted.
Meanwhile, Palm oil expert Dr James Fry said CPO was a competitive fuel in Indonesia in September 2012, 2013 and 2014. But 2015 was different.
In 2015, it looked as though Indonesian CPO was about to become cheaper than crude oil at the end of August, then suddenly, the local price moved up.
He thinks that Indonesia’s mandate had created an interesting stabilisation mechanism for CPO prices.
“Because the Indonesian export levy is a fixed sum per tonne and is unrelated to the CPO price, the revenues from its collection are fairly predictable.
“We have assumed an annual spending of US$750mil on subsidies,” Fry said.
CIMB Investment Bank Bhd analyst Ivy Ng said with Indonesia raising the biodiesel mandate to 20% effective Jan 1, 2016, it expected CPO funds to provide price support for CPO in 2016.
“At the crude oil price of US$40 per barrel, we expect the CPO price to be supported at RM1,950-RM2,430 per tonne, assuming 90% of the projected CPO levy fund is allocated for biodiesel subsidy,” she said.
She added that this could be a game changer for the CPO price, if biodiesel demand in Indonesia exceeded market expectations of 2.5 million to 3.5 million tonnes.