SINGAPORE (Apr 8): Indonesia and Malaysia plans to boost biodiesel mandates for domestic consumption to blunt the impact from unfavourable trade barriers on palm oil.

The higher mandates are expected to absorb a total biodiesel consumption of 8.7 million tonnes this year, up 35% from last.

The additional domestic demand will help mitigate the impact of EU reducing usage of palm oil-based biofuel, says UOB KayHian which is maintaining its “market weight” on the sector.

The European Commission on Mar 13 spelled out the types of palm oil-based biofuel that may be counted towards the EU’s renewable-energy goals and would be introducing a new certification system.

In 2017, biodiesel production in the EU increased from 13.55 million tonnes in 2017 to 13.60 million tonnes in 2018, with market share dropping from 38% of global production to 33%.

This year, Oil World forecasts biodiesel production in the EU might increase to 13.8 million tonnes. However, its market share is seen to drop further to 31% for 2019 with higher biodiesel production coming from Indonesia.

In fact, Indonesia is expected to overtake the US as the world’s largest producer and consumer of biodiesel this year with an expected production of 7.3 million, with crude palm oil (CPO) consumption of about 1.3 million tonnes. Malaysia is expected to consume about 760,000 tonnes of CPO for producing 1.4 million tonnes of biodiesel in 2019.

There is room for Indonesia’s biodiesel consumption to increase further by another 3 million tonnes if the government lifts the biodiesel blending mandate from 20% (B20) to 30% (B30). Indonesia is targeting to increase the mandate to B30 by 2020 or possibly earlier. Meanwhile, Malaysia wants to raise the 10% biodiesel blending mandate to 20% by 2020.

The extension of the B20 mandate to industrial use in Indonesia from Sept 1 2018 and B10 mandate in Malaysia from Feb 1 show both governments’ strong commitment to increasing domestic consumption and reducing inventory.

In 1Q19, CPO prices remained weak as palm oil inventory failed to drop as per market expectation. The unusually high production in 1Q19 in Malaysia and Indonesia capped prices. In addition, news on the EU biofuel restriction did not help to improve market sentiment.

“We maintain our view that CPO prices will see a better recovery in 2H19 on lower production and strong biodiesel demand, and maintain average CPO price assumption at RM2,350/tonne (US$587.50/tonne) for 2019,” says lead analyst Leow Huey Chuen.

UOB picks include Wilmar International and Bumitama Agri with target prices of $3.90 and 81 cents respectively.

As at 11.26am, shares in Wilmar are up 1 cent to $3.49 or 10.5 times FY20F earnings while Bumitama Agri is trading at 72 cents or 8.4 times FY20F earnings.