• Bloomberg reported that Malaysia will review the implementation of the B20 biodiesel policy in the transportation sector due to the coronavirus outbreak. The Plantation Industries and Commodity Ministry will meet with industry stakeholders and petroleum companies to discuss the implementation schedule of B20.

• We believe that this is marginally negative for palm oil as an earlier implementation of B20 would have helped absorb or alleviate increases in palm inventory.

• Malaysia’s palm stockpiles rose to 1.73mil tonnes as at end-March from 1.68mil tonnes as at end-February on the back of higher CPO production.

• B20 was supposed to be implemented in stages, starting with Langkawi and Kedah in January 2020, Sarawak in April and Sabah in August. B20 was supposed to be rolled out in Peninsular Malaysia in June 2021.

• We believe that the implementation of B20 in Sarawak, Sabah and Peninsular Malaysia has been delayed until further notice.

• B20 is estimated to absorb about 1.26mil tonnes of palm oil annually. Currently, B10 in the transportation sector takes up about 761,000 tonnes of palm oil annually. The take-up rate of 1.26mil tonnes is about 6% of Malaysia’s estimated CPO production of 20.5mil tonnes for 2020F.

• Apart from the coronavirus, we think that the implementation of B20 faces challenges due to a few reasons. First, price of CPO is US$237/tonne higher than gasoil currently. Hence, more subsidies are required to implement B20.

• Second early this year, transport operators said that the cost of upgrading of vehicles to enable use of B20 is high. Fleet operators said that they have to invest between RM3,000 and RM4,000 per vehicle.

• We maintain an Underweight stance on the sector and an average CPO price assumption of RM2,300/tonne for Malaysia in 2020F.

Source: AmInvest Research - 17 Apr 2020