Agribusiness - CGS-CIMB Research 2020-06-08: Three Measures To Reinforce B30 Mandate

FIRST RESOURCES LIMITED (SGX:EB5) WILMAR INTERNATIONAL LIMITED (SGX:F34) GOLDEN AGRI-RESOURCES LTD (SGX:E5H)

Agribusiness - Three Measures To Reinforce B30 Mandate

Indonesia has cut the cost of converting CPO into biodiesel to US$80/tonne.
This, coupled with export levy changes, should be sufficient to fund the B30 programme if price gap stays around or below the Rp3,150/litre level.
We are of the view that this is negative for biodiesel producers, neutral for upstream planters and positive for refiners in Indonesia.

Indonesia has cut the cost assumption of converting crude palm oil (CPO) into biodiesel by 20% to US$80 per tonne from US$100 per tonne, according to Energy and Mineral Resources Ministry website. In line with this, the ministry reduced the biodiesel market price index in June to Rp6,941/litre from May’s revised Rp8,352 /litre (after taking into account the new pricing formula). This is not the first as the government cut the conversion costs for biodiesel from US$125 to US$100/tonne in May 2017 to reduce subsidy for biodiesel.

This is on top of a recent decision to raise the export levy for all palm products by US$5 per tonne, effective 1 June 2020 as well as the removal of reference price. Previously, export levies were only charged when the government reference price for CPO exports reached US$570 per tonne, increasing to a maximum of US$50 per tonne when the CPO price exceeded US$619 per tonne.
The changes are to ensure that there are sufficient funds for the domestic biodiesel programme of 30% biodiesel blend in view of the rising price gap between domestic biodiesel prices and gasoil prices. Indonesia's oil palm plantation fund management agency (BPDPKS) supports the biodiesel mandate by bridging the gap between prices of diesel and locally produced palm-based biodiesel to biodiesel producer through the CPO fund. The increase in export levy will raise collection by Rp0.76tr (US$51m).

Thirdly, Indonesia’s Finance Minister recently announced that the government will earmark Rp2.78tr (US$187m) in funds from the state budget to help fund Indonesia’s B30 biodiesel programme in 2020.

The above initiatives clearly demonstrate the government and industry players’ commitment to pursue B30 despite the funding challenges, which became evident following the collapse in the crude oil price. The combination of the rising subsidy required for biodiesel to be viable, coupled with rising volumes of biodiesel that need funding as the government expands the mandate to B30 from B20, has led to concerns over the programme’s sustainability.
Following these changes, we estimate that in total BDPKS may have around Rp30.2tr in funds (US$2.156bn), including funds brought forward from last year in 2020. Assuming 95% of the funds are used for biodiesel to fund estimated biodiesel volumes of 4.3m tonnes in 2H20F, we estimate the funding can support up to Rp3,150/litre subsidy for the rest of the year.
Based on the current crude oil price of US$42/barrel, we estimate the CPO price upside may be capped at RM2,255 per tonne based on the current ex-rate and for B30 to be sustainable given the current funding requirements.

The lower conversion cost for biodiesel in the pricing formula is negative for biodiesel producers. But the impact may be offset by better CPO price as medium-term demand prospects for CPO have improved with the reinforcement policies to support B30 in Indonesia.
We see the changes in export levy to be slightly negative for CPO producers but positive for downstream palm oil players in Indonesia as they could incentivise higher exports of processed palm products from Indonesia vs. Malaysia. The Indonesia players under our coverage that have both upstream and downstream exposure are Wilmar International (SGX:F34), First Resources (SGX:EB5) and Golden Agri Resources (SGX:E5H).
Our regional top picks are Wilmar International (SGX:F34) and First Resources (SGX:EB5).

Ivy NG Lee Fang CFA CGS-CIMB Research | Nagulan RAVI CGS-CIMB Research | https://www.cgs-cimb.com 2020-06-08

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