KUALA LUMPUR/JAKARTA (Nov 29): Biodiesel policies in Indonesia will determine the direction of palm oil prices in the next 12 months as output climbs to a record in the biggest producer, according to Dorab Mistry, director at Godrej International Ltd.
The government should impose financial penalties for non- compliance with its mandate, Mistry said in remarks prepared for a conference in Bandung today. Failure to enforce the rules will mean that palm will continue to trade between 2,200 ringgit ($652) a metric ton and 2,300 ringgit, he said.
Palm, used in food and fuel, entered a bull market this month after top producers Indonesia and Malaysia scrapped export taxes to boost demand and reverse a slump in prices. While Indonesia will miss its biofuel target this year after crude oil plunged, Malaysia has expanded the use of palm-based diesel nationwide to cut stockpiles. Mistry repeated his forecast for prices to reach 2,500 ringgit by March 4 and extend gains as inventories drop to their low around June.
“Indonesia holds the key to price discovery,” said Mistry, who’s traded cooking oils for more than three decades. “If Indonesia implements its palm biodiesel mandate seriously and in full, prices will rise. If Indonesia implements the mandate partially and consumes less palm biodiesel than last year, my price forecast will not be valid.”
Futures fell 1.3 percent to 2,172 ringgit on the Bursa Malaysia Derivatives today, the lowest price at close since Oct. 27. Prices entered a bull market on Nov. 3, climbing more than 20 percent from the 1,929 ringgit close on Aug. 29.
‘Toothless Mandate’
Indonesia may use 1.8 million kiloliters of palm-based biodiesel this year, 45 percent less than the 3.3 million- kiloliter target, after crude fell and pricing issues curbed demand, Fadhil Hasan, executive director at Indonesian Palm Oil Association, said yesterday. The government must set rewards and punishments to implement the mandate, he said.
“Indonesia’s so-called mandate for use of palm biodiesel is a toothless mandate,” Mistry said. “It is actually a request rather than a mandate. For a mandate to be effective, there must be a financial penalty for non-compliance.”
Indonesia plans to increase biodiesel blending to 20 percent in 2016, requiring more than 8 million tons of palm oil, according to the Energy Ministry. The country boosted the amount of biodiesel blending to 10 percent from 7.5 percent in September 2013 and ordered power plants to mix 20 percent from January. The government is committed to expanding palm biodiesel, Hari Priyono, secretary general at Agriculture Ministry, told reporters yesterday.
Absorbing Surplus
Implementation of the mandate would help Indonesia absorb surplus palm oil, Mistry said. Production may jump as high as a record 34.5 million tons in 2016 from 31.5 million tons next year as the higher output cycle starts and trees mature, he said. Indonesia and Malaysia represent 86 percent of global supply, the U.S. Department of Agriculture estimates.
The decline in crude oil prices had a big impact on the use of vegetable oils for biodiesel, Mistry said. An estimated 24 million tons of vegetable oils, and as much as 6 million tons of animal fats, recycled plant oils and used cooking oils are used globally to produce biodiesel, he said.
Crude oil entered a bear market amid the highest U.S. output in three decades and signs of slowing global demand. Brent fell to $71.12 a barrel today, the lowest level since July 2010. Mistry’s palm price estimates are based on the assumption that Brent will trade in a range of $75-$90.
About 80 to 90 percent of biofuel output comes under national mandates and isn’t affected by the price of fossil diesel, Mistry said. Palm usage in biodiesel is 9.3 million tons, accounting for 16 percent of total world consumption, according to Thomas Mielke, executive director at Oil World, a Hamburg-based industry researcher.
“If Indonesia ignores its mandate completely, the palm oil industry will face a crisis in the last half of 2015,” Mistry said. “That is the simple truth.”