Indonesia faces biodiesel funding pressure

Producers remain confident that the Indonesian government will continue to adequately back the biodiesel industry despite growing costs.

The current funding mechanism may face challenges to its viability because of a higher domestic biodiesel mandate and climbing premiums against gasoil, as the coronavirus and output increases by Saudi Arabia ravage crude prices.

Indonesia's oil palm plantation fund management agency (BPDPKS) collects funds accrued from an adjustable export levy on CPO that are redistributed to subsidise biodiesel producers, while refineries are allocated biodiesel to blend without paying more than the fossil fuel alternative.

A $25/t levy is implemented when CPO prices are between $570-619/t and then $50/t when above $619/t. It was set at $50/t in January when CPO hit $729.72/t and then held at this level in February as prices rose to $839.69/t.

Prices have come down since then as the coronavirus pandemic has weakened global demand. But they have maintained values much better than crude because of softer output and higher domestic consumption in Indonesia trying to meet its higher 30pc biodiesel mandate (B30).

Biodiesel premiums against gasoil in Indonesia have increased from an average of 444 rupiah/litre ($32/t) in 2019 to nearly Rp3,300/l this month as a result, according to the US Department of Agriculture. It added that assuming annual CPO exports of 27.5mn t and prices remaining above the $619/t levy threshold, the levy can cover 99pc of the B30 requirement this year. But should the large price differential between gasoil and biodiesel continue extra funding or changes in the subsidy structure will be required.

Indonesia's palm oil association maintains that the government is aware of the challenges facing the current finance mechanism.

The formula used to calculate producer subsidies was already adjusted in May 2017 to cut payouts. The government may have to increase the CPO export levy to bolster the fund but biodiesel, "will continue to be funded by hook or by crook", said one producer.

The lack of funds may also postpone further aggressive expansion to an even higher B40 mandate in January 2021, which was already deemed unrealistic by market participants because of logistical, infrastructure and production challenges.

The BPDPKS last year redistributed Rp2.34 trillion, with the biodiesel industry receiving around 80-90pc of this according to research by Indonesia's environment and forestry ministry. But the agency's new president-director Eddy Abdurrachma, appointed on 2 March, has asserted the importance of its other functions, promising to work hard on "strengthening co-ordination" to improve replanting initiatives in line with a presidential decree.

By Lauren Moffitt & Amandeep Parmar