Lower price making palm oil-based biofuel more attractive

KUALA LUMPUR: The growing gap between palm oil and conventional oil products made from crude is making palm oil-based biofuel more attractive, helping boost exports from Indonesia and Malaysia, the world’s top producers.

Palm oil’s discount to diesel reached US$124 a tonne on Friday, the widest since October 2014, and was at US$107 yesterday, according to data compiled by Bloomberg. That compares with an average premium of about US$134 a tonne in 2017.

Rising biodiesel demand will be a relief to palm oil producers who are facing the lowest prices in nearly three years as traders anticipate rising supplies and softening demand for the edible oil.

More blending of biodiesel will help eat into inventories and support prices which have lost 13% this year.

“If the palm oil-diesel spread remains or gets better, Malaysia could export about 380,000 tonnes of biodiesel this year,” Malaysian Biodiesel Association president Unnikrishnan Unnithan said by phone from Kuala Lumpur.

Producers typically look at palm oil’s discount to diesel when deciding how much to turn into biodiesel, a cleaner-burning alternative to fossil fuels. While there’s no exact optimum price level, a US$100 a tonne discount to diesel means variable costs are covered and producers will try to export, he said.

Malaysia’s exports totalled 235,291 tonnes last year, according to data from the Malaysian Palm Oil Board. Exports climbed to 199,758 tonnes in the first half of the year, compared with 135,049 tonnes a year ago.

Indonesian biodiesel exports have surged “much more” than Malaysia’s thanks to an export tax advantage, according to Unnithan.

China, the world’s biggest buyer of palm oil after India, buys palm methyl ester (PME) mainly from Indonesia because it’s cheaper than Malaysia and tankers from both countries arrived in China in early June, traders told Bloomberg. Chinese buyers purchased between 270,000 tonnes and 300,000 tonnes of PME for delivery between May and August, according to Prima Markets.

Still, while demand for biodiesel has increased, it’s not yet translated to palm oil prices. Prices remain suppressed by rising production, weak global demand and concerns about the escalating trade tensions between US and China, which have whiplashed commodity prices around the globe

“Despite the slight surge in exports of biodiesel, sentiment for palm oil is very weak,” Unnithan said, adding that it may be time for Malaysia to mandate more use of biodiesel in its fuel mix.

“Malaysia should probably look at B10 blending,” he said. In Malaysia, diesel is blended with 7% palm-biofuel in the transport sector, a level that’s mandated by the government. If Malaysia increases this to 10%, it’ll mean an additional 300,000 tonnes of palm oil used for biodiesel, Unnithan said. The association is planning to meet with the country’s new Primary Industries Minister to discuss issues affecting the biodiesel sector, he said.

Indonesia is seeking to bring forward a plan to implement B30 biodiesel next year instead of an initial target of 2020, Rida Mulyana, director-general of new and renewable energy at the Energy and Mineral Resources Ministry, said yeserday. A B30 mandate could increase domestic biodiesel consumption to as much as 6 million kilolitres.

The most active palm oil contract on Bursa Malaysia Derivatives slumped to RM2,147 a tonne on Friday, the lowest since September 2015. It closed at RM2,173 in Kuala Lumpur yesterday.