Plantations - New rules to help jumpstart Indonesia’s biodiesel industry
Recommendation: Neutral
We are positive on reports that (1) the House of Representatives has agreed to raise the biodiesel subsidy by 266% to Rp4,000 per litre; and (2) the MEMR has proposed a new formula to calculate the price of biodiesel in Indonesia. The new pricing index, which will be dependent on crude palm oil instead of MOPs, is favourable for biodiesel producers and will encourage them to participate in future biodiesel tenders. We estimate that the biodiesel subsidy will be sufficient for Pertamina to carry out the government’s biodiesel mandate of 10%, at the current crude oil price of US$55 per barrel as long as CPO stays at or below RM2,366 per tonne. Overall, we stick to our view that the proposals are positive for Indonesia’s biodiesel and CPO producers. Our top picks are First Resources, AALI and SIMP. Neutral maintained.
What Happened
According to press reports, Commission VII Chairman Kardaya Warnika indicated that the House of Representatives has agreed to increase the biodiesel subsidy from Rp1,500 to Rp4,000 per litre, and the bioethanol subsidy from Rp2,000 to Rp3,000 per litre. It was also decided that the subsidy will only be given to the public through the public service obligation schemes or PSO. The Ministry of Energy and Mineral Resources (MEMR) had earlier proposed a subsidy of Rp5,000 litre for biodiesel but this was considered too high when compared to the prevailing international biodiesel prices. It was also reported that the MEMR will implement a new formula to calculate the price of biodiesel. The new formula will be calculated based on palm oil prices (CPO) and no longer use oil prices in Singapore (Mean of Platts Singapore/MOPS). The proposed new formula is CPO price plus a margin of US$188 per tonne multiplied by 870kg per cubic metres. Currently, the price of biodiesel is based on 103.48 multiplied by the reference price of MOPS. The proposal to raise the biodiesel subsidy still needs approval from the parliamentary budget committee, which is due to give its verdict later this month. Government ministry officials say they are confident of a smooth passage.
What We Think
We remain confident that the proposed revisions to the biodiesel subsidy and pricing formula for biodiesel in Indonesia will be able to revive the biodiesel industry in Indonesia, which has slowed down significantly, following the sharp decline in crude oil prices. The new biodiesel pricing formula, which is similar to that applied in Malaysia, is positive for Indonesia’s biodiesel producers. This is because they will now be able to enjoy a fixed profit margin and the pricing achieved for their biodiesel products will no longer be tied to diesel prices (MOPs). Our estimate also shows that with the Rp4,000 litre biodiesel subsidy (US$368 per tonne), it will be economically viable for Pertamina (biggest fuel distributor in Indonesia) to carry out the 10% biodiesel mandate programme at CPO prices of RM2,366 per tonne and below, assuming crude oil prices stay at around US$55/barrel (Refer to Figure 1 for our revised sensitivity table to reflect the new developments). We maintain our view that these revisions, if approved, will be a game changer for the biodiesel industry in Indonesia.
What You Should Do
The key beneficiaries are biodiesel producers in Indonesia (Wilmar and First Resources) and plantation companies (which will enjoy higher CPO prices due to stronger demand). We maintain our Neutral sector rating.
Source: CIMB Daybreak - 06 February 2015
Recommendation: Neutral
We are positive on reports that (1) the House of Representatives has agreed to raise the biodiesel subsidy by 266% to Rp4,000 per litre; and (2) the MEMR has proposed a new formula to calculate the price of biodiesel in Indonesia. The new pricing index, which will be dependent on crude palm oil instead of MOPs, is favourable for biodiesel producers and will encourage them to participate in future biodiesel tenders. We estimate that the biodiesel subsidy will be sufficient for Pertamina to carry out the government’s biodiesel mandate of 10%, at the current crude oil price of US$55 per barrel as long as CPO stays at or below RM2,366 per tonne. Overall, we stick to our view that the proposals are positive for Indonesia’s biodiesel and CPO producers. Our top picks are First Resources, AALI and SIMP. Neutral maintained.
What Happened
According to press reports, Commission VII Chairman Kardaya Warnika indicated that the House of Representatives has agreed to increase the biodiesel subsidy from Rp1,500 to Rp4,000 per litre, and the bioethanol subsidy from Rp2,000 to Rp3,000 per litre. It was also decided that the subsidy will only be given to the public through the public service obligation schemes or PSO. The Ministry of Energy and Mineral Resources (MEMR) had earlier proposed a subsidy of Rp5,000 litre for biodiesel but this was considered too high when compared to the prevailing international biodiesel prices. It was also reported that the MEMR will implement a new formula to calculate the price of biodiesel. The new formula will be calculated based on palm oil prices (CPO) and no longer use oil prices in Singapore (Mean of Platts Singapore/MOPS). The proposed new formula is CPO price plus a margin of US$188 per tonne multiplied by 870kg per cubic metres. Currently, the price of biodiesel is based on 103.48 multiplied by the reference price of MOPS. The proposal to raise the biodiesel subsidy still needs approval from the parliamentary budget committee, which is due to give its verdict later this month. Government ministry officials say they are confident of a smooth passage.
What We Think
We remain confident that the proposed revisions to the biodiesel subsidy and pricing formula for biodiesel in Indonesia will be able to revive the biodiesel industry in Indonesia, which has slowed down significantly, following the sharp decline in crude oil prices. The new biodiesel pricing formula, which is similar to that applied in Malaysia, is positive for Indonesia’s biodiesel producers. This is because they will now be able to enjoy a fixed profit margin and the pricing achieved for their biodiesel products will no longer be tied to diesel prices (MOPs). Our estimate also shows that with the Rp4,000 litre biodiesel subsidy (US$368 per tonne), it will be economically viable for Pertamina (biggest fuel distributor in Indonesia) to carry out the 10% biodiesel mandate programme at CPO prices of RM2,366 per tonne and below, assuming crude oil prices stay at around US$55/barrel (Refer to Figure 1 for our revised sensitivity table to reflect the new developments). We maintain our view that these revisions, if approved, will be a game changer for the biodiesel industry in Indonesia.
What You Should Do
The key beneficiaries are biodiesel producers in Indonesia (Wilmar and First Resources) and plantation companies (which will enjoy higher CPO prices due to stronger demand). We maintain our Neutral sector rating.
Source: CIMB Daybreak - 06 February 2015
