Malaysia’s  Plantation  Industries  &  Commodities  Minister  Dato  Sri Douglas  Uggah  Embas  launched  Johor’s  biodiesel  programme  last Monday.  While  this  was  no  surprise,  we  are  nevertheless  positive  on the move as it represents progress in the country’s biodiesel rollout. Making  biodiesel  mandatory  is  crucial  in  absorbing  excess  palm  oil, especially in 2H. We remain NEUTRAL on the sector.  
 
- No  surprise.  As  mentioned  in  our  19  July  3Q  Strategy  report,  our channel  checks  indicated  that  the  biodiesel  rollout  in  Johor  came  into effect this month, although not in full force. After the official launch of the biodiesel programme this week, all 415 petrol stations in Johor will  start selling the B5 blend. 

- Salient points from Plantation Industries and Commodities Ministry: i) The southern region will use about 37k tonnes of biodiesel per year, ii) the  central  region,  in  which  usage  was  rolled  out  about  years  ago,  will consume  about  115k  tonnes  annually,  iii)  biodiesel  production  this  year is  expected  to  reach  300k  to  400k  tonnes,  largely  driven  by  export growth,  and  iv)  the  Malaysian  Government  is  still  targeting  an  annual 500k  tonnes  of  palm  oil  usage  for  biodiesel  production  upon  full nationwide rollout in July 2014.  

- Timeline of rollout. Although the rollout has been delayed from the Jan 2013 deadline originally planned, it is still well within the revised timeline announced around February this year. The programme will next be rolled out will be in northern states of West Malaysia in October. That said, we believe the Government can afford to be more aggressive with the rollout now that the required subsidy is smaller owing to the currently low price of  crude  palm  oil  (CPO).  In  1H  this  year,  the  subsidy  for  biodiesel amounted to a mere MYR7.6m vs MYR72m for the whole of last year.  

- Exports pick up strongly. It would appear that the low end of the 300k–400k tonnes of biodiesel production for Malaysia is achievable, provided that export market picks up further in 2H. 1H biodiesel exports grew four-fold y-o-y to 72.6k tonnes but this is still far below the installed capacity. There  are  currently  seven  active  plants  with  combined  1m-tonne capacity.  

Source: RHB