JAKARTA • Indonesia will probably miss a target to boost palm oil-based biodiesel consumption to a record as industries shun the biofuel in the absence of state subsidies, according to a palm oil producers’ group.

Demand is seen at about three million kilolitres this year, below the government’s target of 4.6 million kilolitres, said Fadhil Hasan, ED of the Indonesian Palm Oil Association, or Gapki.

That compares with 3.3 million kilolitres used last year, according to data from the Energy and Mineral Resources Ministry.

Falling demand for biodiesel blending may weigh on futures in Malaysia amid concerns that crude palm oil production in Indonesia and Malaysia, the top growers, will recover after the worst El Nino in almost two decades curbed output last year.

Indonesia’s government is unlikely to extend biodiesel subsidies to industries as it grapples with a widening fiscal deficit and increases focus on infrastructure and social welfare programmes, Fadhil said.

“The government has a very tough time managing the fiscal deficit,” Fadhil said on Wednesday in an interview in Jakarta. “Their priority is infrastructure and social programmes and not so much biodiesel.”

Indonesia has been promoting the use of biodiesel as part of plans to help the world’s largest palm oil producer reduce carbon emissions and absorb excess supply.

South-East Asia’s largest economy requires the transportation industry to use diesel blended with 20% palmbased biofuel.

The government subsidises that programme under the so-called public service obligation.

“Missing the target on biodiesel usage could make Indonesian palm oil inventory level become higher than expectation, which could bring a negative impact on CPO (crude palm oil) price,” Hariyanto Wijaya, an analyst at PT RHB Securities Indonesia, said in an email response to questions.

The programme is funded through levies on exports of palm oil products. The Indonesia Estate Crop Fund for palm oil manages the charges and also uses it for replanting ageing palm trees.

The extent of biodiesel use this year will also depend on the amount of levy collected and crude oil prices, Fadhil said.

Benchmark palm oil prices dropped as much as 1% to RM2,555 a tonne on Bursa Malaysia Derivatives Exchange, before trading at RM2,563 by the mid-day break in Kuala Lumpur.

Futures have lost about 18% this year, while crude oil in New York has retreated about 15%, remaining in a bear market. The Indonesian government collects US$50 (RM215) a tonne on exports of CPO, with different rates applying for other products.

Indonesia may produce 35.5 million tonnes of CPO this year, up from 33 million tonnes, Fadhil said. Output may exceed 40 million tonnes by 2020, he said.

While production will continue to rise, it will grow at a slower rate because of government curbs on plantation expansion and environmental issues, he added.

President Joko Widodo extended in May a moratorium on new permits for land conversion and land use in much of the country’s primary forests and peatland for another two years.

The ban issued in 2011 has now been extended twice as environment groups and consumers including Unilever plc and Nestle SA push for production of palm oil that’s certified as sustainable.

Global palm oil production may increase an average 3% annually over the next decade, with more supply expected to come from Africa and South America, Fadhil said. — Bloomberg