- According to news reports, Indonesia’s Energy and Mineral Resources Ministry has proposed to increase the biodiesel subsidy from an earlier proposal of Rp1,500/liter to Rp5,000/liter (US$0.39/litre).

 - The Ministry is also proposing that 3.41 million kilolitres (1.2 million tonnes) of biodiesel to be mixed in diesel.

 - The proposals are pending approval by the House of Representatives. The proposals are in response to the weak implementation of biodiesel in the country.

 - Pertamina said that it had failed to hold a biodiesel tender due to poor infrastructure and selling price. In 2014, only 1.17 million kiloliters (413,182 tonnes) of biodiesel were blended, lower than the target of 1.57 million (554,440 tonnes) kiloliters.

 - Currently, the selling price of biodiesel for the producers is linked to gas oil futures, which have been falling in the past couple of months.

 - Based on current levels, Brent crude oil would be about US$417/tonne compared with CPO price of US$602/tonne (RM2,150/tonne).

 - Based on the subsidy of US$0.39/litre, we believe that that the subsidy would be enough to partly cover the cost of biodiesel production of US$702/tonne.

 - On a per tonne basis, the subsidy of US$0.39/litre is estimated at US$441.

 - We view the proposals positively as it would help improve the feasibility of biodiesel production in Indonesia. Also, the biodiesel proposal of 3.41 million kiloliters would help alleviate any increase in palm oil inventory in Indonesia.

 - Indonesia is forecast to produce about 33 million tonnes of CPO in 2015F compared with 31.5 million tonnes in 2014.

 - Risk is the implementation and execution of the policy. Also, the speed of implementation would depend on the length of the approval process by the House of Representatives.

 - Maintain NEUTRAL on the plantation sector.

Source: AmeSecurities