This article first appeared in The Edge Financial Daily on August 10, 2017

Plantation sector
Reiterate neutral: We attended the inaugural Palm Biodiesel Conference at the Holiday Inn Kuala Lumpur Glenmarie organised by the Malaysian Biodiesel Association (MBA) on Monday and Tuesday. The event was well attended, with about 150 participants from the regional palm biodiesel industry. We returned with our “neutral” view unchanged regarding biodiesel’s potential impact on prices in the near to medium term.

Since the sharp fall in crude oil prices at end-2014, palm oil has traded well over gas-oil prices (a positive palm oil-gas oil [Pogo] spread), leading to a significant drop in discretionary demand for biodiesel. As noted by Petronas Chemicals Group Bhd head of marketing Eric Ho, the key decision for oil and gas companies on biodiesel production is the potential value contribution, as methanol products have multiple uses, including industrial, petrochemical and fuel usage. We gather that without a strong value contribution, producers may well reduce their production allocation for biodiesel. On the demand side, MBA deputy president Long Tian Ching and Indonesian Association of Biofuel Producers (Aprobi) vice chairman Paulus Tjakrawan noted that export demand for biodiesel, especially from Europe, had dropped with the higher crude Pogo spread since 2014, leading to increased importance of domestic demand.

KPMG principal Chris de Lavigne noted that developing markets will be the main driver of growth for biodiesel over the next few years, largely due to national mandates. For example, Thai Biodiesel Producer Association chairman Sanin Triyanond observed that Thai biodiesel production tends to decrease as domestic stocks decline, indicating that the Thai biodiesel mandate is partly a tool to absorb excess palm oil stocks. Without discretionary demand, De Lavigne noted that future demand could be driven by local government requirements, particularly global emission commitments, as well as price support for the agricultural sector and energy security.

While the European Union remains among the largest palm biodiesel buyers, the recent proposed ban on palm methyl ester biodiesel could herald a decline in palm imports from the region. As a silver lining, LMC International head of Southeast Asia Dr Julian McGill believes that a complete ban would be unrealistic and changes would not be immediately seen, as he sees the voting process as a prelude to extended discussions, which would likely soften the impact of the potential policy changes. International Sustainability and Carbon Certification board member Vasu R Vasuthewan agreed that a complete ban is highly unlikely, but noted that the regulatory trend in Europe could lead to higher taxes or non-tariff barriers, phase out of food-based biodiesels and possibly mandatory certification on non-biofuel palm oil products.

Several speakers pointed to key long-term trends affecting the industry, such as declining diesel demand and rising popularity of electric or hybrid vehicles as a potential competitor to fuel-based renewable energy. In light of these trends, Malaysian Palm Oil Board principal research officer Harrison Lau recommended that the industry look towards further developing biodiesel standards and consider further downstream processing of biofuel products into lubricants, solvents and other materials. Tjakrawan mentioned that Aprobi is similarly looking into new developments for Indonesian biofuels, such as bioavtur (jet fuel), biobutanol, and alternative feed stocks including algae and biomass.

We reiterate “neutral” on the plantation sector with no change to our 2017 crude palm oil (CPO) price of RM2,550 per tonne. Unless CPO price drops significantly, or crude oil price sees an unlikely resurgence, we believe biodiesel is unlikely to re-emerge in the near term as a CPO price driver. With the Pogo spread currently at about US$120 (RM514.8) per tonne, this indicates a CPO price floor of about RM2,000 per tonne. Should we enter into a declining price environment, we think big caps with downstream facilities such as IOI Corp Bhd, Kuala Lumpur Kepong Bhd and PPB Group Bhd through its associate, Wilmar, should benefit from lower input costs. — Kenanga Research, Aug 9