Malaysia’s biodiesel plan faces uphill struggle as crude slumps

By BLOOMBERG

Malaysia, the second-largest palm oil producer, will increase use of palm in biodiesel for transportation in phases from Dec 1 before making it mandatory on Feb 1, according to Primary Industries Minister Teresa Kok.

The country’s petroleum companies will need to increase the blending ratio of palm methyl ester in fossil fuels to 10%, or B10, from 7%, or B7. There were also increases in the industrial sector.

The higher mandate may boost domestic consumption and narrow the usage gap with Indonesia, which recently expanded its mandate to B20. Still, a slump in crude prices could threaten implementation.

Palm oil prices may recover on declining stockpiles and as production slows in the first quarter (1Q), while crude oil could hover at US$60 (RM251.40)-US$70 a barrel, according to Sathia Varqa, owner of Palm Oil Analytics in Singapore.

That means the price window between palm oil and gas oil is closing fast, he said.

If the palm oil-gas oil spread rapidly narrows, plans to make B10 mandatory by February may have to be deferred again, Varqa said.

“There is a will to implement B10 due to political promises made by the new government, but economically, the success is unclear.”

Unlike Indonesia that subsidises its biofuel programme through export levies on palm products collected by the Estate Crop Fund for Palm Oil, Malaysia may have to rely on government funding.

It’s cheap to implement B10 now, but when palm prices recover, there’ll be a need for subsidies or a cut in the mandate’s requirements, said Bloomberg Intelligence analyst Alvin Tai.

“It will be silly to force a B10 blend if palm oil prices are very high relative to crude oil.”

Palm oil’s discount to gas oil narrowed to about US$88 a tonne yesterday, according to data compiled by Bloomberg, more than halving from US$220 in October.

That’s below the US$100 level which is typically needed to cover variable costs and encourages producers to export palm-biofuel.

Malaysia expects the B10 mandate to absorb 761,000 tonnes of palm oil locally each year, which will cut swelling stockpiles and boost prices.

While it may consume that much palm next year, there’s doubt it can do the same in 2020, Varqa said.

Palm oil is having a horrendous year. Prices are down 19% this year and were trading at RM2,020 a tonne yesterday.

Futures may rise to between RM2,200 and RM2,400 in the 1Q, according to Sime Darby Plantation Bhd, the biggest grower by acreage.