- Platts reported that Indonesia’s Parliamentary Panel has allocated Rupiah 4,000/litre (32 US cents/litre) as subsidy for biodiesel production and Rupiah 3,000/litre for ethanol in the 2015 state budget.

- Previously, a biodiesel subsidy of Rupiah 5,000/litre was proposed. According to the head of the Parliamentary Panel, the subsidy of Rupiah 5,000/litre was high. Based on global prices, the subsidy of Rupiah 4,000/litre would be enough.

- Based on the subsidy of Rupiah 4,000/litre, the subsidy bill would come up to Rupiah 10.4trilllion (US$821.6mil) versus Rupiah 17.4trillion (US$1.37bil) previously.

- The head of the panel also said that what has been agreed by the panel would likely be agreed by the budget commission. Hence, the allocated subsidy of Rupiah 4,000/litre is likely to be final.

- We note that the panel did not change the pricing formula of biodiesel. Hence, we reckon that the selling price of biodiesel in Indonesia would still be based on gasoil futures in Singapore. Previously, it was reported that the selling price may follow Malaysia’s formula where it is fixed at RM515/tonne.

- Also, there was no mention whether the proposed biodiesel target of 3.41 million kilolitres (1.2mil tonnes) for 2015F has been revised downwards.

- Based on yesterday’s CPO and gasoil prices, we believe that the subsidy of Rupiah 4,000/litre would allow biodiesel producers to be profitable. This assumes that gasoil prices do not continue to fall and CPO prices continue to rise.

- We estimate that without the subsidy, biodiesel producers would be making an operating loss of US$240/tonne. With the subsidy, the operating profit would be about US$86/tonne.

- The biodiesel subsidy and targets would be positive for CPO prices as it would improve demand for palm oil. This would help alleviate any increase in palm oil inventory in Indonesia. Indonesia’s CPO production is forecast at 33mil tonnes in 2015F compared with 31.5mil tonnes in 2014.

- Risks are implementation and energy prices. Implementation of biodiesel in Indonesia may be affected by poor infrastructure. In addition, biodiesel may not feasible if energy prices resume its downward trend again. Brent crude oil is currently RM1,473/tonne compared with CPO price of RM2,319/tonne.

Source: AmeSecurities