The reversal of crude palm oil (CPO) prices to below US$900 per ton and its repercussions in the domestic market have forced the government to take yet another drastic measure to help the commodity by advancing the B35 biodiesel mandatory program later this month.
Overview
The reversal of crude palm oil (CPO) prices to below US$900 per ton and its repercussions in the domestic market have forced the government to take yet another drastic measure to help the commodity by advancing the B35 biodiesel mandatory program later this month. The policy is expected to reduce the mounting local CPO inventories but not really help the government’s effort to bring down cooking oil prices.
CPO prices continued to plunge in recent weeks as a result of a major surplus in CPO inventories, following Indonesia’s anti-market policies of requiring a domestic market obligation (DMO) of CPO to curb cooking oil prices and abrupt decision to ban exports of CPO and its derivative products for three consecutive weeks in April and May. The situation worsened following the difficulties faced by CPO exporters in finding cargo vessels to carry CPO. At the same time, oil palm farmers were entering the harvest period.
Palm Oil Producers Association (GAPKI) data showed that Indonesia’s stocks of palm oil reached 6.1 million tons in April, above the average level of 3.5 million to 4 million tons, as a result of the DMO. According to the Palm Oil Agribusiness Strategic Policy Institute (PASPI), the export ban caused stocks to soar to 8 million tons by the end of June. Worse, inventories in Malaysia, the world’s second-largest producer after Indonesia, also rose to a new record of 1.66 million tons in June.
Responding to the situation, the government decided to make B35 biodiesel – a mixture of 35 percent CPO and 65 percent diesel fuel – mandatory beginning July 20. Dadan Kusdiana, the director general of new, renewable energy and energy conservation at the Energy and Mineral Resources Ministry, explained that the program would begin on July 20, and it would add demand for biofuel by 727,805 kiloliters to a total of 10.88 million kl this year. Dadan further explained that the mandatory B35 biodiesel program was a stop gap to reaching the actual target of the mandatory B40 biodiesel program, which he expected could be implemented by the end of this year.
The government claimed that the rising usage of domestically grown palm oil for biodiesel not only drove up local demand for CPO but also saved the country from foreign exchange used to import diesel fuel. Last year alone, savings reached Rp 66.5 trillion (US$4.42 billion). Moreover, the production cost of biodiesel is much lower than imported diesel fuel; Rp 21,000 per liter for imported diesel as opposed to Rp 13,775 for biodiesel.
The mandatory B35 biofuel program, however, will likely have a negative effect on the government’s target of lowering cooking oil prices. Our sources said that CPO companies mostly preferred to supply CPO for biofuel production rather than for cooking oil because the former has a mechanism in place to compensate CPO producers for price differences but not the latter. Moreover, the government’s flip-flopping in cooking oil policies has mostly penalized CPO producers.
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