Malaysia biodiesel plan faces squeeze from low crude oil prices

[KUALA LUMPUR] A new mandate in Malaysia to use more biodiesel will not create enough new demand to drain surplus output of crude palm oil (CPO) in the world's second-biggest producer as exports slow in coming months, planters say.

Malaysia said in May it will increase the minimum biodiesel content for the transport sector to 10 per cent from 7 per cent. It will also introduce a 7 per cent mandate for the industrial sector.

The current low crude oil prices are expected to make it tougher for biodiesel to compete and government predictions of consumption are seen falling short to tackle the surplus.

Both programmes, due to start this month, should increase Malaysia's annual domestic consumption of CPO to 709,000 tonnes, the government said.

That would be a marginal increase from the current level of about 500,000 tonnes a year, say industry players. They think consumption should increase to 1.3 million tonnes to siphon off domestic stocks bound to rise in the coming months as export demand slows after the Muslim holy month of Ramadan.

Malaysia's palm oil inventories fell 8.8 per cent to 1.65 million tonnes at end-May, but are forecast to rise in the last quarter of the year as output sees seasonal gains.

"The mandate won't see a significant impact because we are a small nation, unlike Indonesia," said Roy Lim, group plantations director of Malaysian palm oil firm Kuala Lumpur Kepong.

Indonesia, the world's top palm oil producer, requires a 20 per cent blend of biodiesel into gasoil in 2016 to reduce its crude oil import bill, cut greenhouse gas emissions and create more palm oil demand.

The nation consumed 1.05 million kilolitres of unblended subsidised biodiesel from January to May, said Dadan Kusdiana from Indonesia's CPO fund agency.

Previous efforts by Malaysia to boost biodiesel use in the transport sector have had little success because of delayed implementation and weak enforcement.

Low crude oil prices will also make it difficult for Malaysia to implement its new biodiesel programmes. With benchmark crude oil futures trading around US$47 a barrel, traders say crude palm oil should be around 1,500 ringgit (S$493.60) per tonne for biodiesel to be competitive.

Benchmark palm oil stood at 2,436 ringgit a tonne at 0502 GMT on Friday. Still, palm has lost nearly 9 per cent in the past two weeks as investors sold off on concerns over weaker exports ahead.

"Implementation is going to be tough in this low crude oil price environment. Given the spread between palm oil and crude oil, we don't see an incentive for biodiesel producers," said David Ng, derivatives specialist at Phillip Futures Sdn Bhd.

REUTERS