Indonesia  is  raising  its  biodiesel  mandate  to  B15  from  B10  last  year. This  plus  Malaysia’s  steady  pace  of  adoption,  along  with  Germany’s legislation  change  which  could  potentially  benefit  palm  biodiesel demand, should help to neutralise the effects of weak crude oil price. We  continue  to  like  Bumitama  Agri,  Astra  Agro  Lestari  and  Genting Plantations  for  sector  exposure.  We  are  also  increasingly  positive  on First Resources. Maintain NEUTRAL.

Pieces are falling into place.  Indonesia will raise its biodiesel blend to B15 compared to B10 last year. The country could use 4.8m tonnes of palm  oil  for  biodiesel,  according  to  its  Ministry  of  Energy  and  Mineral Resources’  director  general  Rida  Mulyana.  While  the  news  did  notappear  to  excite  the  market,  we  take  it  as  a  positive  developm ent  in which  the  Jokowi  administration  is  supportive  of  biodiesel.  Separately, Jakarta  Post  reported  that  the  state-owned  petroleum  company Pertamina has kicked off an auction for  the procurement of 3m kilolitres of biodiesel.

Decisive  action.  Compared  to  its  first  tender  last  year,  the  current auction  is  very  decisive  and  will  make  up  for  the  bulk  of  the  full-year requirement.  Indonesia’s  palm  oil  inventory  was  last  quoted  at  an  unburdensome  2.5m  tonnes,  hence  the  biodiesel  demand  will  have  a meaningful impact on reducing its stockpile further.

State of infrastructure.  We are doubtful that Indonesia’s infrastructure is ready for country-wide distribution of biodiesel, which was a problem hindering the biodiesel programme  last year.  Nevertheless, we suspect that  where  there  is  ready  infrastructure,  more  volume  will  be  pushed through.

Malaysia’s  biodiesel  export  picks  up.  We  found  it  strange  that Malaysia’s  biodiesel  export  in  the  first  two  months  this  year  has averaged 19,000 tonnes compared with 3,600 tonnes last year, given the current low crude oil price. We believe this could be due to a change in Germany’s biofuel legislation to that based on feedstock with the  highest greenhouse gas (GHG) reduction.

Maintain NEUTRAL.  Our preferred  BUYs  are  Bumitama  Agri  (BAL SP, TP:  SGD1.48), Astra Agro Lestari (AALI IJ, TP:  IDR28,569) and Genting Plantations (GENP MK, TP: MYR11.40).