Indonesia: Palm Oil Climbs Most in Four Years on Indonesian Biofuel Subsidy

(Bloomberg) — Palm oil advanced the most in more than four years on Indonesia’s plans to boost biodiesel subsidies, which would expand palm demand in the largest producer and consumer.

The parliament’s energy commission and the government approved an increase to 4,000 rupiah ($0.32) a liter from 1,500 rupiah. The move needs to be passed by the budget committee in parliament, the directorate general for oil and gas at the Energy & Mineral Resources Ministry said yesterday.

Palm oil, used in everything from fuel and candy to instant noodles, retreated 9.3 percent in the past year as a plunge in petroleum costs cut its appeal for biodiesel and soybean oil fell to a six-year low. The increase would mean positive margins for biodiesel producers, according to Alvin Tai, an analyst at RHB Investment Bank Bhd. in Kuala Lumpur.

“This law, if passed, would be a positive catalyst for palm oil prices,” Tai said in a report on Thursday. “This would help provide a boost to CPO demand assuming the B10 mandate is fully implemented,” he said, referring to crude palm oil and the biodiesel program.

Futures climbed 5.1 percent to 2,310 ringgit ($648) a metric ton on the Bursa Malaysia Derivatives on Thursday, the biggest advance at close since October 2010.

The biodiesel mandate is feasible with the increased subsidy, said Hariyanto Wijaya, a Jakarta-based analyst at PT Mandiri Sekuritas. It will boost palm demand for biodiesel to 1.7 million tons this year from 800,000 tons in 2014, he wrote in a report on Thursday.

Palm Premium

A further decline in petroleum costs would reduce the impact of the higher flat-rate subsidy, RHB’s Tai said. Palm oil’s premium over gas oil has expanded to about $120 a ton from a discount of $259 in August. Brent crude lost 48 percent in 2014 and has extended the decline by 4.3 percent this year.

More use in biofuel could boost crude palm consumption in Indonesia by 1.5 million tons in 2015, said Ivy Ng, an analyst at CIMB Investment Bank Bhd. in Kuala Lumpur. The move may spur PT Pertamina, the biggest fuel distributor, to hold more tenders to buy biodiesel, she said in a report.

“Hopefully yes,” Ahmad Bambang, the marketing director, said by text message, when asked whether a 4,000 rupiah subsidy would encourage the company to hold tenders.

The country’s target for biodiesel production is 2015 is 3.4 million kiloliters, said Dadan Kusdiana, director of bioenergy at the Energy & Mineral Resources Ministry. Output last year was 1.7 million kiloliters, half the 3.4 million goal, he said in a text message.

To contact the reporter on this story: Ranjeetha Pakiam in Kuala Lumpur atrpakiam@bloomberg.net

http://www.bloomberg.com/news/articles/2015-02-05/palm-oil-climbs-most-in-28-months-on-indonesian-biofuel-subsidy

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