B35 biodiesel program may temporarily boost CPO price

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The Jakarta Post

19 January 2023

By: Divya Karyza

The government's push for the mandatory 35 percent biodiesel (B35) program may boost weakening crude palm oil (CPO) prices, but probably only temporarily, market observers anticipate.

A repeat of the historic CPO spot price of 6,873 ringgit (US$1,592) per tonne and CPO futures price at 8,000 ringgit per tonne recorded in March 2022 is deemed unlikely this year, as prices have started to normalize.

Malaysia's benchmark crude palm oil price FCPOc3 for April delivery on the Bursa Malaysia Derivatives Exchange gained 58 ringgit, or 1.53 percent, to 3,853 ringgit a tonne by the midday break on Wednesday.

Girta Yoga, senior research and development executive at the Indonesia Commodity and Derivatives Exchange (ICDX), said CPO prices in 2022 had been an anomaly resulting from Indonesia's CPO export ban and the Russian invasion ofUkraine.

But the government's B35 program, which will mandate a greater use of palm oil in the production of biodiesel, is expected to temporarily hoist CPO prices by boosting domestic CPO consumption for biodiesel to 11.44 million tonnes per year, according to Girta.

B35 is a blend consisting of 35 percent palm oil-derived fatty acid methyl ester (FAME) and 65 percent fossil fuel diesel.

"The program [making B35 mandatory] will have a positive impact on the CPO price in the market as it is expected to increase domestic CPO consumption, thereby reducing CPO supply for the global market," he told The Jakarta Post on Wednesday.

As a comparison, Indonesia consumed a total of 20.96 million tonnes of CPO in 2022, data from the Indonesian Oil Palm Association (GAPKI) show, the largest share of which was absorbed for food production at 9.94 million tonnes, followed by biodiesel and oleochemical production at 8.84 million and 2.18 million tonnes, respectively.

The Energy and Mineral Resources Ministry is to begin implementing the B35 program for all biofuels on Feb. 1 with the stated goal of reducing Indonesia's dependence on fuel imports while also boosting the domestic use of palm oil to help raise CPO prices.

The biodiesel quota is set at 13.14 million kiloliters for 2023, up 19 percent from the 11.02 million kl allocated for 2022.

Market participants are banking on the B35 implementation to help drive palm oil prices in Malaysia higher, although some have expressed disappointment that the blend will be lower than the anticipated 40 percent.

Meanwhile, Indonesia is testing two types of B40, the first being a mix of diesel with 40 percent FAME and the second a mix of diesel with 30 percent FAME and 10 percent green diesel made from refined, bleached and deodorized palm oil (RBDPO).

Abrar Aulia, an industry and area analyst at state-owned lender Bank Mandiri, said that, considering the available supply of competing vegetable oils, including soybean oil and the appreciating ringgit, the CPO price is expected to post a lower average of around $891 per tonne in 2023 compared with an average of $1,181 per tonne in 2022.

Indonesia has set its CPO reference price at $920.57 per tonne for the period of Jan. 16 to 31, up from $858.96 per tonne for Jan. 1 to 15, as per Trade Ministry Decree No. 53/2023. The pricing would place Indonesia's palm oil export tax at $74 per tonne and levy at $95 per tonne for the period.

"Global CPO demand will affect CPO prices, so if global demand is increasing, prices will increase, and vice versa," Abrar told the Post on Tuesday.

Indonesia announced the B35 program last year to increase domestic CPO demand in the hope of undoing a drop in fresh fruit bunch (FFB) prices as a government-imposed export ban had resulted in an expected domestic supply glut.

The short-lived ban, which was part of a series of measures curbing palm oil products with varying degrees of success to keep cooking oil prices from spiraling out of control, shook markets and exacerbated existing global supply concerns.