We attended the inaugural Palm Biodiesel Conference at Holiday Inn Kuala Lumpur Glenmarie from 7th to 8th August organized by the Malaysian Biodiesel Association (MBA) and returned with our neutral view unchanged regarding biodiesel’s potential impact on prices in the near-to-medium term. With palm oil prices still trading higher than gasoil prices, we expect minimal effect on CPO prices from biodiesel due to flat volumes. Over the next few years, we gather that increasing oversight in export markets would lead to increased domestic market focus through the use of mandates and incentives. For the longer term, we understand that technological trends could reduce demand for biodiesel, increasing the need for new advancements in the sub-sector. No change to our NEUTRAL call given limited biodiesel impact, barring CPO price declines. In such an environment, downstream players such as IOICORP (OP; TP: RM5.50), KLK (MP; TP: RM26.56) and PPB (OP; TP: RM19.35) through its associate, Wilmar, should benefit from lower input costs. Other calls are maintained, namely OUTPERFORM on IJMPLNT (TP: RM3.92), TSH (TP: RM2.20), HSPLANT (TP: RM3.00) and UMCCA (TP: RM7.60); and MARKET PERFORM on SIME (TP: RM9.50), GENP (TP: RM12.40), FGV (TP: RM2.10), TAANN (TP: RM4.10) and CBIP (TP: RM2.15).
1st Palm Biodiesel Conference. We attended the inaugural Palm Biodiesel Conference at Holiday Inn Kuala Lumpur Glenmarie from 7th to 8th August organized by the Malaysian Biodiesel Association (MBA). The event was well attended, with about 150 participants from the regional palm biodiesel industry. We returned with our neutral view unchanged regarding biodiesel’s potential impact on prices in the near-to-medium term.
In a challenging price environment... Since the sharp fall in crude oil prices in end- 2014, palm oil has traded well over gasoil prices (a positive palm oil-gasoil or POGO spread) leading to a significant drop in discretionary demand for biodiesel. As noted by Mr Eric Ho (Head of Marketing, Petronas Chemicals), the key decision for oil and gas companies in biodiesel production is the potential value contribution, as methanol products have multiple uses, including industrial, petrochemical and fuel usage. We gather that without a strong value contribution, producers may well reduce their production allocation for biodiesel. On the demand side, Mr T. C. Long (Deputy President, Malaysia Biodiesel Association) and Mr. Paulus Tjakrawan (Vice Chairman, APROBI) noted that export demand for biodiesel, especially from Europe, had dropped with the higher POGO spread since 2014, leading to increased importance of domestic demand.
… developing markets & sustainability drive growth. Mr Chris de Lavigne (Principal, KPMG) noted that developing markets will be the main driver of growth for biodiesel over the next few years, largely due to national mandates. For example, Mr Sanin Triyanond (Chairman, Thai Biodiesel Producer Association (TBPA)) observed that Thai biodiesel production tends to decrease as domestic stocks declined, indicating that the Thai biodiesel mandate is partly a tool to absorb excess palm oil stocks. Without discretionary demand, Mr de Lavigne noted that future demand could be driven by local government requirements, particularly global emission commitments, as well as price support for the agricultural sector and energy security.
Biodiesel export difficulties to continue. While the EU remains among the largest palm biodiesel buyers, the recent proposed ban on palm methyl ester (PME) biodiesel could herald a decline in palm imports from the region. As a silver lining, Dr. Julian McGill (Head of South-East Asia, LMC International) believes that a complete ban would be unrealistic and changes would not be immediately seen, as he sees the voting process as a prelude to extended discussions, which would likely soften the impact of the potential policy changes. Mr Vasu R. Vasuthewan (Board Member, ISCC) agreed that a complete ban is highly unlikely, but noted that the regulatory trend in Europe could lead to higher taxes or non-tariff barriers, phasing out of food-based biodiesels and possibly mandatory certification on non-biofuel palm oil products.
Technology the key? Several speakers pointed to key long-term trends affecting the industry, such as declining diesel demand and rising popularity of electric or hybrid vehicles as a potential competitor to fuel-based renewable energy. In light of these trends, Dr. Harrison Lau (Principal Research Officer, MPOB) recommended that the industry look towards further developing biodiesel standards and consider further downstream processing of biofuel products into lubricants, solvents and other materials. Mr Tjakrawan mentioned that APROBI is similarly looking into new developments for Indonesian biofuels, such as bioavtur (jet fuel), biobutanol, and alternative feed stocks including algae and biomass.
Reiterate NEUTRAL on Plantations with no change to our FY17E CPO price of RM2,550/metric ton (MT). Unless CPO prices drop significantly, or crude oil prices see an unlikely resurgence, we believe biodiesel is unlikely to re-emerge in the near term as a CPO price driver. With the POGO spread currently at c.USD120/MT this indicates a CPO price floor of c.RM2,000/MT, or - 20% from current price levels. Should we enter into a declining price environment, we think big-caps with downstream facilities such as IOICORP (OP; TP: RM5.50), KLK (MP; TP: RM26.56) and PPB (OP; TP: RM19.35) through its associate, Wilmar, should benefit from lower input costs.
Source: Kenanga Research - 9 Aug 2017