Highlights

• According to Reuters, the Indonesian government’s plan to raise biodiesel subsidies has passed another important hurdle, as the energy parliamentary committee agreed to raise Indonesia’s biodiesel subsidy to Rp4,000/litre (US$0.32/litre) from Rp1,500/litre (US$0.12/litre) currently. The government had earlier on proposed to raise the subsidy to Rp5,000/litre.

• The subsidy increase proposal still needs approval from the parliamentary budget committee, which is due to make a decision later this month.

• Such move is aimed at protecting Indonesia’s biodiesel industry from lower crude oil prices, hence potentially boosting demand for palm oil.

Our View

• While the subsidy agreed is lower than the amount the Indonesian government had proposed earlier on, we view the latest development positively, as higher biodiesel subsidy improves the economic viability of biodiesel, hence boosting consumption of palm oil.

• Based on our estimates, the higher biodiesel subsidy will lower the breakeven production cost for biodiesel by US$250/tonne, assuming: (1) The Indonesian parliamentary budget committee approves the raise in biodiesel subsidy to Rp4,000/litre; and (2) Biodiesel producers to receive the entire biodiesel subsidy.

Catalysts

• Implementation of higher biodiesel mandate in Indonesia and Malaysia.

• Weather uncertainties revisit, which would result in supply distortion, hence boosting prices of edible oil.

Risks

• Higher-than-expected soybean yield and soybean planting, resulting in lower soybean prices, hence prices of CPO.
• India imposes higher import duty on CPO.
• Escalating production cost (in particularly, labour cost).

Rating

NEUTRAL

Positives

• Long term sector outlook remains favourable

Negatives

• Weak demand and price outlookSector View
• Maintain average CPO price projection of RM2,300/tonne and RM2,400/tonne of 2015 and 2016 respectively, as well as Neutral stance on the sector.

Source: Hong Leong Investment Bank Research - 6 Feb 2015