The Chain: SE Asian biodiesel mandates may drive palm oil demand

Global and SE Asian Supply Update

Globally, according to the U.S. Department of Agriculture, global palm oil production over the next two years is forecast to grow by 6 percent, increasing to 65.39 million metric tons (2016 to 2017) from 61.64 million metric tons (2014 to 2015).

Regionally, USDA has now forecasted that Indonesia’s palm oil output in October 2016 to September 2017 will climb 4.7% to 33.5 million metric tons on positive La Niña impacts.In part, the prediction is driven by anticipated increased production in Indonesia and Malaysia as the effects of El Niño’s regional dryness diminish. However, it is also a result of these countries’ domestic mandates for increased biodiesel production.

SE Asian Biodiesel Demand

Also reported, Indonesia’s biodiesel program is driving industrial domestic consumption and is expected to grow to 3.5 million metric tons, bringing total consumption to 9.62 million metric tons October 2016 to September 2017. Indonesia’s biodiesel mandate requires a 20% blending of palm oil into petroleum for vehicle use by 2016, similar to the U.S. ethanol mandate. The recently announced 10% Malaysian biodiesel mandate – a blend of 10% palm methyl ester with petroleum diesel – is an increase from the current 7% mandate.

The implementation of the B10 is proposed to reduce Malaysia’s palm oil stockpile and increase the price of crude palm oil prices.

SE Asian Company Commentary

As reported by Bloomberg, Felda Global Ventures (FGV:MK) CEO Zakaria Arshad stated that Malaysia’s proposed biodiesel mandate was a “catalyst” because higher biodiesel consumption would “reduce credit palm oil dumping and stabilize prices”.

At the same time, Indonesian state power firm PLN says that Indonesia’s proposed 30% biodiesel mandate is unworkable as it could damage generators.

US Biodiesel Demand

Finally, U.S. imports of biodiesel are up 92% year over year, as of June 30, 2016, with the majority of U.S. imports from Argentina – soy oil – and Indonesia – palm oil – driven by the U.S. Renewable Fuel Standard.

Investor Impacts

As reported by Chain Reaction Research, neither the Indonesian or Malaysian mandate contains environmental or social safeguards for palm oil sourcing that might protect shareholders from investing in firms exposed to financial risks resulting from clearcutting forests and land grabbing.

Editor’s note: Previous Chain Reaction Research articles have likewise addressed EU biodiesel policy and Brexit impacts.