The Malaysian Biodiesel Association continues to push to implement the B10 mandate by Apr 2016, which could potentially lift the usage of CPO for biodiesel to 1.2m tonnes (2015: 0.6m tonnes). If implemented, this would be positive for CPO prices. Still, it is a tricky balancing act given the additional subsidy to be borne by the Government in the light of the current low crude oil prices. Maintain OVERWEIGHT, with First Resources (FR SP, BUY, TP: SGD2.69) as our Top Pick.

Continued push for B10. Yesterday, the Malaysian Biodiesel Association (MBA) announced its continued push for the successful execution of the national biodiesel mandate. With the nationwide implementation of the B7 mandate since Nov 2014, the MBA is now pushing for the implementation of the B10 mandate by Apr 2016 and the B20 mandate by 2017. This is a delay from the originally targeted date of Oct 2015 for B10 implementation. The MBA believes that Apr 2016 is a more realistic target, as it may take a few more months to iron out the potential issues.

Potential usage of 1.2m tonnes of CPO. In 2015, 750,000 tonnes of biodiesel was produced, of which 575,000 was utilised in the transport sector. Currently, B7 biodiesel is not being utilised by the industrial sector, likely due to the current price discount of MYR0.30/litre between industrial diesel and biodiesel. The MBA expects the implementation of the B10 mandate to increase CPO consumption to 1.2m tonnes/year (0.8m for transport and 0.4m for industrial) – which in turn could reduce palm oil stock by 0.6m tonnes and increase CPO prices by MYR680/tonne (MBA’s estimate based on a linear regression model). This would be positive for the 22 biodiesel players in Malaysia that are currently running at an average utilisation rate of 28%.

A balancing act. While we think implementing the B10 mandate would be positive for CPO prices, it is a tricky balancing act as the subsidy currently borne by the Government for the production of biodiesel would increase, particularly in the light of current crude oil prices. We have not imputed any increase in biodiesel usage in Malaysia or Indonesia in our CPO price forecasts. Prime beneficiaries would include Genting Plantations (GENP MK, BUY, TP: MYR11.95) (300,000 tonnes capacity), Felda Global (FGV MK, SELL, TP: MYR1.35) (350,000 tonnes) and Sime Darby (SIME MK, NEUTRAL, TP: MYR7.60) (60,000 tonnes).

Still OVERWEIGHT. Notwithstanding biodiesel mandates, we think the supply deficit caused by El Nino is enough to lift CPO and stock prices in the medium term.

Source: RHB Research - 29 Jan 2016