The recent rise in Brent crude prices has narrowed the negative spread between gasoil and palm oil to just USD6/barrel (bbl). Even if the spread does not narrow further, it still benefits palm oil given that Indonesia’s subsidy can cover a bigger number of biodiesel tonnage. We believe numbers make sense right now but the market has not factored in any potential success of Indonesia’s biodiesel implementation.

• Improving equation. With the recovery in energy prices, the negative spread between Mean of Platts Singapore (MOPS) gasoil price and palm oil has narrowed to USD6/barrel (bbl). This effectively means that the export levy to be imposed by Indonesia will be able to cover a bigger number of biodiesel tonnage, hence improving its probability of success.
• Export levy. To recap, Indonesia will impose an export levy ofUSD50/tonne for crude palm oil and USD30/tonne for refined palm oil. Assuming Indonesia exports 20m tonnes of its 32m tonnes palm oil production in refined form, it stands to collect USD600m in export levy.
• Cost of biodiesel. For the purpose of supply to Pertamina, biodiesel is priced at CPO price plus USD125/tonne, which translates into USD712. Compared this with gasoil price of USD74.16/bbl or USD543.6/tonne, there is a deficit of USD168.9/tonne to be covered by the abovementioned USD600m export levy. This works out to be 3.55m tonnes of palm biodiesel, which is close to triple of last year’s usage.
• Market playing wait and see. Given its failure to implement B10 biodiesel last year, the market is naturally sceptical that Indonesia can deliver its B15 program this time around. Indonesian palm oil equity has declined in recent weeks on the upcoming imposition of the export levy,but it has not factored in the potential impact of the levy on palm oil price nor the potential incremental demand from biodiesel usage.
• El Nino. Australia’s weather authority said the probability of El Nino in 2015 has increased to 70%. Again, with El Nino failing to occur last year, nobody is paying attention but once the current rainy season stops, we may start to see palm oil price react.