B10 implementation may be tougher than anticipated

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IN contrast to Indonesia, where its parliament last week agreed to hike the biodiesel subsidy to IDR4,000 (about RM1.12) per litre from IDR1,500 per litre previously — a moved lauded as highly beneficial for the country’s nascent biofuel industry —biodiesel producers in Malaysia say they are still at a massive disadvantage despite the mandates and incentives given to encourage domestic consumption.

The comparatively lower biodiesel demand in Malaysia and uncompetitive pricing abroad due to low crude oil prices mean that producers cannot operate at full capacity. While the government is trying to fast-track the implementation of the B10 blend in order to encourage production and demand, some operators have chosen to leave their plants idle until biodiesel production starts making economic sense again.

An industry source says the move to implement B10, which is a blend of 10% palm methyl ester and 90% petroleum diesel, faces fierce opposition from other industries.

“The car manufacturers are especially reluctant to adopt a higher blend due to fuel efficiency fears, even though we feel it is just a perception issue. Those in the non-subsidised industrial sector also feel that changing to biodiesel is not cost effective as they are already relying on gas or steam,” he says.

The consultation process among the stakeholders will likely be prolonged, which means that Indonesia is likely to overtake Malaysia in terms of domestic biodiesel consumption as well as industry growth.

“The ministry agrees with us on the importance of B10 and eventually B20, but we understand the challenges. In Indonesia, a single presidential decree, for example, can push forward industry mandates,” the source says.

Following a dialogue session with palm oil players in Putrajaya on Feb 12, Plantation Industries and Commodities Minister Datuk Seri Amar Douglas Uggah Embas acknowledged that there are complications and “teething problems” in pursuing B10 implementation but did not specify what they are.

“If we can push forward with B10, that means we can use up to a million tonnes of crude palm oil (CPO), which will be a big relief for the industry. We cannot announce yet [the timeline for the implementation of B10] until we resolve these issues,” he told the press.

However, a major upside is that any upgrade in the blend can be quickly adopted by the producers. According to Uggah Embas, blending facilities will take only about one month to adjust to a higher blend.

“We have spent over RM300 million on these blending facilities,” he said.

Even with the existing B7 biodiesel mandate, the production capacity of local producers far exceeds current local demand.

A head of biodiesel for a major integrated palm oil firm says while the B7 rollout has been fairly successful, biodiesel consumption remains low overall.

“Existing demand in Malaysia is relatively low compared with the current biodiesel production capacity of two million tonnes per year. B7 only bumps up consumption to half a million tonnes per year, so producers still have to run at way below capacity,” he says.

While Indonesia’s biodiesel subsidy is channelled straight to the producers, Malaysian operators do not enjoy the same incentive.

Petroleum companies currently purchase palm biodiesel from producers based on a refined, bleached and deodorised palm oil plus RM515 per tonne formula, the latter of which is to cover the cost of transport and converting the oil to palm methyl ester or biodiesel. The petroleum companies will blend the biodiesel and diesel.

Previous estimates have pegged the Malaysian biodiesel price at around RM2.38 per litre compared with the current diesel retail price of RM1.70 per litre.

The differential is rectified under a price structure between the government and the petroleum companies to fill biodiesel in their petrol pumps, which means that it is subsidised.

A spokesman from the Ministry of Plantation Industries and Commodities tells The Edge the lower crude oil price environment has drastically affected the biodiesel industry, which in turn impedes the government from pursuing more proactive mandates.

“The viability of the biodiesel programme is dependent on the difference between diesel and CPO prices. If the cost of the blend (B7) is higher than pure diesel, then it is not viable,” he says.

However, the ministry is also exploring options to encourage consumption, particularly in non-subsidised sectors.

The government subsidises certain sectors such as transport and fisheries to the tune of RM18.3 million in 2013. Apart from this, the voluntary use of B10 biodiesel qualifies industrial consumers for an incentive of RM300 per tonne under Skim Insentif Biodiesel Sawit.

“Nevertheless, the government is looking at the possibility of mandating a higher blend than the B7 for use in the industrial sector to support our biodiesel industry,” he says.

At the moment, the prevailing crude oil prices will likely determine biodiesel’s growth prospects going forward. In a Feb 10 note, CIMB Research plantations analyst Ivy Ng says Indonesian biodiesel producers are able to turn a profit thanks to the proposed subsidies, which in turn should boost industry volume.

“At the current Brent crude price of US$57 per barrel, we estimate a CPO biodiesel breakeven price of RM1,417 per tonne (without subsidy) and RM2,419 (with Indonesia’s subsidy). Compare this with the current CPO price of about RM2,300 per tonne,” she says.

This is in stark contrast to Malaysia’s biodiesel producers who are not subsidised and remain dependent on factors beyond their control.

The head of biodiesel for a major integrated palm oil firm says the sweet spot for producers would be when crude oil and CPO trade at US$80 per barrel and RM2,200 per tonne, respectively.

“The window of opportunity for biodiesel producers open and close very fast according to market conditions. Now, we just have to wait for the next window to open,” he says.

 

This article first appeared in The Edge Malaysia Weekly, on February 16 - 22, 2015.