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ANALYSIS: Indonesia hits the accelerator pedal in its palm oil biodiesel expansion plans

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Indonesia says it will finish research into its B40 programme - producing biodiesel containing 40% palm oil - by November. The country plans to mandate the use of B40 by July 2021.

 

The B40 plans were stalled earlier this year largely by the weak price of CPO (crude palm oil), which dropped to $476.47 (Ringgits 2,000) per tonne on May 6 but by the end of July had recovered to around $667 per tone, on the Bursa Malaysia Derivatives exchange.

 

The current mandate is B30 - biodiesel containing 30% of crude palm oil’s fatty acid methyl ester (FAME). B30 is the world’s highest palm-based biodiesel mix so far.

 

Populist vote-gathering

 

Indonesia’s biodiesel ambitions are not only about weaning itself from crude oil exports. The B40 push will "support 17m oil palm smallholders" according to a TV interview with Indonesia’s economc coordinating minister at the end of July.

 

He reiterated his country’s aim of achieving a 100% CPO biodiesel next year, which no doubt cheered the country’s CPO producers even further.

 

Indonesia has been labelled a "flawed democracy" by the Economist Intelligence Unit - but votes matter, and the CPO smallholders are a key constituency.

 

Indonesia is by far the world’s biggest CPO producer, with around 58% of the total 75m tonnes. Malaysia comes a distant second, with 28%, according to the USDA. Indonesia in 2020-21 is likely to produce around 43m tonnes of CPO.

 

Indonesia is the undisputed giant of CPO - but is B100 a realistic proposal?

 

It all depends on relative prices

 

Leaving aside concerns about the suitability of vehicles to run on CPO biodiesel blends - Indonesia’s Truck Operators Association has already complained about damage to engines after using B20 - there are other constraints.

 

In February, Santosa (he’s known by just that name), president of Astra Agro Lestari - an Indonesian palm oil producer which farms around 20,000 hectares and is part of Astra International - said the shift to B40 could be tricky as it would require Indonesia to increase its CPO production by 3m tonnes.

 

Not that this was insuperable as he expects - given favourable weather - Indonesia to get to 62m tonnes within five years.

 

But getting to B50, half the government’s target, would be a stretch, he said. That would "depend on the global crude oil price, the price of palm oil, and how much we can export."

 

Subsidy dependent

 

In June, Indonesia’s government raised the export levy on CPO by $5 to $55 per tonne, in an effort to raise more funds for its domestic biodiesel plans.

 

The USDA said in July it expects a post-Covid rebound in CPO exports to 27.8m tonnes during 2020-21 (against an estimated 26.8m tonnes in 2019-20). The 2020-21 estimate for domestic CPO consumption is put at 14.525m tonnes.

 

Indonesia’s oil palm plantation fund management agency (BPDPKS) uses the funds gathered from the CPO export levy (which might be $1.5bn in 2020-21) to supports its biodiesel mandates by bridging the gap between traditional diesel prices and the (more expensive) locally produced biodiesel.

 

The spread has widened significantly this year as a result of the decline in crude oil prices.

 

BPDPKS distributed more than $150m in subsidies last year - but it will need more than $2bn to maintain its financial support for the B30 mandate. B100 - even B50 - look like non-starters.

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