Plantation - CIMB Research 2016-05-31: Malaysia raises biodiesel mandates

FIRST RESOURCES LIMITED EB5.SI GOLDEN AGRI-RESOURCES LTD E5H.SI WILMAR INTERNATIONAL LIMITED F34.SI FIRST RESOURCES LIMITED EB5.SI

Plantations - Malaysia raises biodiesel mandates

Malaysia has agreed to raise the biodiesel blend for the transport sector to B10 and implement B7 in the industrial sector progressively, starting 1 Jun 2016.
The government estimates that this will raise biodiesel consumption to 709k tonnes.
This is mildly positive for regional planters and Malaysian biodiesel producers.
Maintain Neutral and an average CPO price of RM2,450 per tonne for 2016.

The Government of Malaysia has agreed to strengthen the biodiesel programme by increasing the blend for the transport sector to B10 (blend of 10% palm methyl ester with 90% petroleum diesel) and implementing the B7 programme (blend of 7% palm methyl ester with 93% petroleum diesel) in the industrial sector (commercial and power generation sectors).

The government has revealed that both programmes will be implemented progressively beginning in Jun 2016. All diesel sold at the retail pumps nationwide will be B10 effective Jun 2016. The B7 programme will be introduced for the first time in the industrial sector. However, it is not clear from the statement if B7 will be implemented fully or progressively starting 1 Jun 2016.

The implementation of B10 for the transport sector and B7 for the industrial sector is expected to contribute to annual consumption of 709,000 tonnes of biodiesel in Malaysia and lead to savings of 820m litres of diesel as well as 2.16m tonnes of carbon dioxide equivalent annually.

The government has conducted a series of stakeholders’ engagement with transport sector representatives, petroleum companies and biodiesel producers on its plans to raise the biodiesel blend.
In addition, the Federation of Malaysian Manufacturers (FMM), representing the industrial sector, was also consulted.

We are not surprised by the government’s move to raise the biodiesel blend as this has been hinted before. However, we are slightly surprised by the government’s estimate that the higher biodiesel blend will only raise Malaysia’s biodiesel consumption to 709,000 tonnes. This is 34% lower compared to our calculation of 1.08m tonnes of biodiesel usage based on previous statistics provided.
This also suggests that biodiesel consumption in Malaysia may increase by only 23% (or 134,000 tonnes) compared to the previous practice of the B7 blend for the transport sector, which was estimated to have absorbed 575,000 tonnes of biodiesel. We suspect the more conservative figure provided for biodiesel consumption could be due to lower diesel usage in Malaysia, following the removal of fuel subsidies.

This development is positive for CPO prices. However, the incremental demand for palm oil is not as significant compared to earlier expectations at around 139,000 tonnes per annum or 0.7% of Malaysia’s 2016 palm oil output. Assuming the biodiesel mandates lead to a take-up of 709,000 tonnes of biodiesel uptake in 2016, it will only represent around 3.6% of Malaysia’s estimated CPO output and utilise 28% of total installed biodiesel capacity in Malaysia of approximately 2.5m tonnes.
This is not as aggressive compared to Indonesia’s biodiesel targets of B20 (or 20% biodiesel blend) which is expected to raise biodiesel usage in Indonesia to 2.35m in 2016, representing around 7-8% of the country’s total CPO output. In view of our preliminary calculation that this policy will have only a marginal positive impact on incremental demand, we have kept our average CPO price forecast unchanged at RM2,450 per tonne for 2016 and RM2,600 for 2017.

We are of the view that the higher biodiesel mandate will be mildly positive for biodiesel producers in Malaysia (Sime, FGV, KLK, GENP and Wilmar) and CPO producers. However, this could be slightly negative for consumers who may have to fork out slightly higher retail diesel prices (which incorporates the blended biodiesel costs).
Maintain Neutral with AALI, GENP and First Resources as our top picks.

Ivy NG Lee Fang CFA CIMB Securities | http://research.itradecimb.com/ 2016-05-31

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