From its first tender that began in September 2013, state-owned oil company Pertamina has secured 1.2 million kiloliters of biodiesel from 6.6 million kiloliters of total biodiesel demand for 2014-2015.

The pricing policy is based on Singapore'€™s diesel price (MOPS) minus alpha, with the alpha varying among 26 clusters across Indonesia. We think this pricing policy may not be suitable for biodiesel producers who do not own oil palm plantations, as loss-making probabilities exist if biodiesel prices become higher than crude oil prices.

Pertamina will start its second tender to fulfill remaining demand in early January 2014, with the results announcement expected at the end of the month. In a worst-case scenario, should the second tender fail to secure the entire demand, Pertamina could still purchase remaining biodiesel supplies from third parties at the biodiesel Fatty Acid Methyl Ester (FAME) price.

With Malaysia'€™s November production (figure 1) having decreased 6 percent month-on-month (m-m) to 1.86 million tons, we expect similar conditions of lower production to materialize in December. We believe that low crop production will persist throughout the first quarter of this year.

A similar biodiesel mandate is also being applied in Malaysia, with the government setting a 5 percent blending requirement, reflecting an additional 600 kilotons of crude palm oil (CPO) demand in 2014. The Indonesian government is considering whether to implement a biodiesel mandate in the aviation industry (2 percent by 2016, 3 percent by 2020). This will likely have limited impact as total annual avtur, supplied by Pertamina, totals only 4.3 million kiloliters.

During our recent investor meetings in Singapore, Hong Kong and Tokyo last month, investors'€™ interests in the plantation sector appeared to remain high, with most closely following developments in Pertamina'€™s biodiesel tender.

We maintain our expectation that the CPO price (figure 2) will remain at the current high level of around US$900 per ton (CIF Rotterdam) through the first quarter of this year, translating into a 2014 average of $871 per ton, up 2 percent year-on-year (y-y).

We expect a smooth execution of Indonesia'€™s 10 percent biodiesel mandate, as Pertamina still has the option to buy the remaining supplies at market prices should the second tender fail to secure 2014-2015 estimated supplies. CPO players are also keen for this tender to be successful, as an unsuccessful biodiesel mandate would mean lower CPO demand, resulting in a weak 2014 CPO price, particularly as we also expect huge supplies from other vegetable oils in 2014.

At this stage, we maintain our '€œneutral'€ rating on the Indonesian plantation sector. We estimate that a strong US dollar and high CPO prices in the first half of 2014 would support average 2014 company earnings growth of 140 percent y-y. Our top pick remains with Astra Agro, as we expect 2014 earnings per share (EPS) growth to reach 123 percent y-y, backed by downstream expansion.

The writer is senior research manager at PT Bahana Securities.