​Crude oil’s crash jeopardizes Asia’s cleaner fuel ambitions

Beijing, China

Shockwaves from the oil price crash have hammered Asia’s biofuels industry, upending optimism over its future.

“These are unprecedented times,” said Alvin Tai, an analyst at Bloomberg Intelligence. Crude’s nosedive erases any chance of discretionary blending of palm oil with diesel, and drastically inflates the cost of government mandates.

Biofuels, such as a blend of diesel with palm, need to be attractively priced compared with fossil fuels to encourage consumption, and that often requires subsidies. The almost 25 per cent plunge in Brent crude oil on Monday has suddenly made palm oil’s competitive position dramatically worse.

Some calm returned to markets on Tuesday, with Brent recovering eight per cent and palm oil steadying after plunging more than 10 per cent at one stage a day earlier.

Even so, palm oil was as much as $200 a ton more expensive than gasoil, as diesel is also known, on Tuesday, the widest premium in more than three years. That will probably jeopardize efforts by Indonesia and Malaysia – the top producers of the tropical oil – to use more biofuel at home.

The premium “makes discretionary palm oil biofuel economically unviable,” said Oscar Tjakra, an analyst at Rabobank in Singapore. “The rule of thumb is for palm to be cheaper by $120 compared to gasoil for discretionary blending.”

Low crude oil prices will increase “economic burdens on countries which provide subsidies to their biofuel industry,” said Tjakra. “In the long run, investments on new and additional biofuel production capacities could be delayed as they are not economically viable.”

Indonesia, the world’s biggest producer, exporter and user of palm oil, has been at the centre of efforts to boost consumption in biofuel.

To encourage use of green fuel, a government body known as the Oil Palm Plantation Fund Management Agency has been offering incentives to the biodiesel industry financed by levies on exports. The fund, holding an estimated $1 billion, will probably need to pay about $200 per ton in subsidies to spur use of the biofuel, according to Tai from Bloomberg Intelligence.

“The bigger the crude price drop, the faster it’ll eat into the biodiesel fund,” said Tai. “Indonesia can maybe survive another six months, but beyond that, they’ll need to start collecting levies to keep the program going.”

The government, which restored a $50 per ton levy on crude palm oil exports in January, says it plans to raise the duty as palm’s premium over gasoil widens, which boosts costs for exporters who may then pay farmers less.

The biofuel association in Indonesia believes the fund has enough money to support the industry despite the crude price plunge, though the group also expects the government will step in with policy measures.

“The government will definitely assess the situation and will likely take action in the near future,” said Paulus Tjakrawan, vice-chairman of the Indonesia Biofuel Producers Association. “Some adjustments may be needed if crude prices continue to remain low by increasing the levy or other options.”

Malaysia, the second-largest producer, plans to fully implement its B20 biodiesel program in the transport industry by mid-2021. That means blending 20 per cent of palm with diesel. Despite the plunge in oil, “B20 will be implemented as planned in an effort to reduce greenhouse gas emissions,” according to Ravi Muthayah, secretary-general at the commodities ministry.

© 2020 Bloomberg L.P.

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