Negligible impact from biodiesel mandate

March 27, 2010, Saturday
KUCHING: Plantation stocks should benefit less so from palm oil price impact but more so from the removal of risk relating to the bearing of subsidies which are now directed at petroleum companies.

NEGLIGIBLE IMPACT: Research believes the impact of Malaysia’s biodiesel mandate on palm oil demand for next year would be negligible given that it would only be introduced in stages within central Peninsular Malaysia.

OSK Research Sdn Bhd (OSK Research) believed the impact of Malaysia’s bio­diesel mandate on palm oil demand for next year would be negligible given that it would only be introduced in stages within central Peninsular Malaysia.

Assuming that the central Peninsular Malaysia uses 50 per cent of Malaysia’s total diesel consumption of 10 million tonnes, maximum demand for palm oil biodiesel next year will amount to just 146,000 tonnes if implemented all at one go rather than in stages.
Hence, the impact to palm oil price should be positive but likely insignificant, added the research
firm.

Generally, Malaysia exported a total of 227.5 thousand tonnes of biodiesel last year, compared with available capacity of 1.5 to 1.7 million tonnes, indicating a very low utilisation rate of 15 per cent, which was consistent with global biodiesel plant utilisation.
The research firm highlighted the company in its coverage with biodiesel exposure in Malaysia is Sime Darby Bhd (inherited from Golden Hope) with capacity of 90,000 tonnes per annum, breaking it down from 30,000 tonnes in Carey Island plus 60,000 tonnes from Teluk Panglima Garang.

That also included Kulim that had effective capacity of 100,000 tonnes per annum in Tanjong Langsat, Johor. However, Kulim’s biodiesel unit had been running at a loss due to selling price and low capacity utilisation. Last year, the segment reported a RM10.4 million loss.
While utilisation rates should improve with the biodiesel mandate, it was highly uncertain if it would be a good enough to turn around loss-making biodiesel ventures, as the pricing mechanism was still unknown.

To recap, Malaysia’s biodiesel mandate would start in June next year. The blend would be five per cent and would be introduced in stages in the central states of Peninsular Malaysia.
The subsidies on biodiesel would be borne by petroleum companies but the government would bear the RM43.1 million cost of developing six petroleum depots with blending facilities, sources from Business Times.

OSK Research said the country’s overall utilisation rate would remain relatively low at less than 50 per cent even upon full implementation, assuming biodiesel produced for export market remained constant.