Low prices will hamper demand for biodiesel, analysts

PETALING JAYA: Hong Leong Investment Bank (HLIB) Research opined that the planned B7 Biodiesel programme is not expected to boost crude palm oil (CPO) price significantly mainly due to CPO's narrow discount against soy oil and the economic viability of voluntary biodiesel demand given the current low crude oil price.
PublicInvest Research, concurred with this view in its research note saying that the time is not right for the implementation of the programme considering that crude oil selling price is even cheaper than biodiesel processing costs.
"We doubt its viability at current crude oil prices, which has fallen by more than 15% over the last 2 months," it said. PublicInvest Research however maintained that the long-awaited development is certainly positive and will help to ramp up domestic consumption and potentially reduce petrol subsidies.
Malaysia plans to implement the B7 Biodiesel programme, with a blending of 7% palm biodiesel and 93% petroleum diesel for the subsidised sector in Peninsular Malaysia in stages from next month, and expand this to Sarawak, Sabah and the federal territory of Labuan by December 2014.
Under the B7 Biodiesel Programme, 7% of palm oil methyl ester will be added to diesel and it is expected to see the consumption of 575,000 metric tonnes of biodiesel, contributing to savings of 667.6 million litres of diesel a year.
Based on HLIB Research estimates, the implementation of the B7 Biodiesel programme nationwide will boost biodiesel consumption in Malaysia to 448,000 metric tonnes per annum from 155,000 metric tonnes in 2013, assuming the country's subsidised transport sector consumes 6.4 million metric tonnes of diesel a year.
"The additional biodiesel consumption will then ease palm oil stockpile in Malaysia by 14%, based on September 2014's stockpile of 2.09 million metric tonnes," it added.
HLIB is maintaining average CPO price projections of RM2,400 and RM2,300 per metric tonne for 2014 and 2015 respectively, as well as its "neutral" stance on the sector.
CIMB Research, on the other hand, expects the rollout of the B7 Biodiesel programme to raise Malaysia's palm oil demand by 263,000 to 390,000 tonnes per annum, equivalent to 1% to 2% of the total palm oil production in 2013.
"As this equates to an additional monthly CPO demand of only 22,000 to 33,000 tonnes, we keep our average CPO price forecast at RM2,390 and RM2,460 per tonne for 2014 and 2015, respectively," it said.
CIMB Research said this is the government's second policy to support CPO price following a reduction in export taxes for CPO to zero, but it is not expected to drive up CPO price significantly.
Plantation stocks reacted positively yesterday to the B7 Biodiesel programme, with Kuala Lumpur Kepong Bhd and Batu Kawan Bhd rising 98 sen and 30 sen to RM23.44 and RM18.30 respectively.
On the third-quarter (Q3) financial results for plantation stocks, PublicInvest Research sees muted outlook even though average prices for CPO in the Q3 was 5% weaker versus the same period last year.
"The relatively lower selling prices should be cushioned by stronger FFB (fresh fruit bunches) production as most planters have registered impressive production growth especially Genting Plantations Bhd and Ta Ann Holdings Bhd," it said.
In addition, PublicInvest Research expects stiffer competition for Malaysia's exporters starting this month as Indonesia has also adopted zero-export tax policy as October's reference price of US$640 per metric tonne fell below the minimum price of US$750 per metric tonne.
It has maintained a "neutral" call on the plantation sector due to the lack of short-term catalysts.