CPO: Indonesian's Biodiesel Subsidy Boost

CPO had a good rally at the end of last week before correction set in yesterday. The correction is not surprising given the sharp rally. I expect CPO prices to find support at RM2200, though a retest of the recent low at RM2100 cannot be ruled out.


 Chart: CPO's weekly chart as at Feb 9, 2015 (Source: iFS.marketcenter.com)

Last week's rally in CPO prices could have been driven by news that the Indonesian Government proposed to raise its biodiesel subsidy & biodiesel allocation. However, it is now reported in the Jakarta Post that "in the deliberation on the proposed revision to the 2015 State Budget, the House of Representative Commission VII overseeing energy, has cut the biodiesel allocation to Rp6.8tr (US$544m), from the earlier proposal by the Energy and Mineral Resources Ministry of Rp17tr (US$1.4bn)". This was picked up by CIMB Research yesterday.

The lower budget allocation reflects the lowered biodiesel subsidy of Rp4,000 per litre from Rp5,000 per litre. On top of this, the volume of subsidised diesel is lowered to 1.7m kilolitres (kl) from the earlier proposed 3.41m kl. This is because the subsidy will only be given to the public through the public service obligations scheme (PSO or the subsidised transport diesel). For more, go here.

All is not lost. The lowered biodiesel subsidy of Rp4,000 per litre is still higher than the current biodiesel sales subsidy of Rp 1,500 per liter. And, despite the cut in the volume of subsidised diesel from the earlier proposed 3.41m kl to 1.7m kilolitres (kl), the lower target may not be fully utilized by the public. See the table below.

Table 1: Indonesia's Biodiesel Production & Distribution from 2006-2014 (Source: USDA's GAIN Report entitled: Indonesia Biofuels Annual 2013)

From the latest USDA report entitled "Oilseed: World Market & Trade", we can see that palm oil supply/production and distribution/usage have risen steadily by 29% & 28%, respectively over the past 4  years. The slightly faster increase in supply/production has led to an increase in inventory from 6.1 million MT in 2010 to 7.8 million MT in 2014. Unless usage picks up, the increased supply will put downward pressure on CPO prices going forward.


Table 2: Palm Oil: World Supply & Distribution from 2010-2014 (Source: USDA's Oilseeds: World Markets & Trade Report for Jan 2015)

Note:
In addition to the disclaimer in the preamble to my blog, I hereby confirm that I do not have any relevant interest in, or any interest in the acquisition or disposal of, CPO or plantation stocks.