SINGAPORE (May 19): Following the recent announcement of renewed government funding for Indonesia&rsquo s B30 Biodiesel programme, CGS-CIMB analysts Ivy Ng and Nagulan Ravi have maintained their &ldquo neutral&rdquo call on upstream planters despite a positive outlook for downstream players due to a widening export levy between crude (CPO) and processed palm oil (PPO). 

On May 18, Indonesia&rsquo s Finance Minister Sri Mulyani announced a renewal of the country&rsquo s B30 biodiesel mandate with a Rp2.78 trillion ($266.2 billion) government earmark and an increased palm oil export levy of US$5 ($7.10) to fund the programme. The scheme is expected to raise Rp3.54 trillion to maintain a 30% biodiesel blend in Indonesian diesel. 

  The B30 programme -- launched last December -- represents the highest mandatory mix in the world. The rationale of this requirement was to reduce carbon emissions, as well as Indonesia&rsquo s reliance on fuel imports. The government was considering a further B40 programme despite questions about the feasibility and logistics of such a requirement, though this has been postponed indefinitely owing to the Covid-19 pandemic. 

  Indonesia' s oil palm plantation fund management agency (BPDPKS) supports the B30 mandate by bridging the gap between prices of conventional diesel and locally-produced palm oil biodiesel. Yet, price difference between these products has grown to Rp3732/litre as opposed to Rp444/litre in 2019. Reported to have only around Rp19 trillion at the end-December 2019, analysts estimate that BPDPKS may be unable to support the 9.6 million kilolitres of biodiesel needed to meet B30. 

  &ldquo The current government subsidy mechanism is already struggling to prop up the current B30 programme [while] palm oil premiums against gasoil (POGO) remain at three-year highs,&rdquo noted Lauren Moffitt for Argus Media, a London-based media firm analysing energy and commodity markets. BPDPKS obtains funding from Indonesia&rsquo s CPO export levy, which ranges from US$10-50 depending on prevailing CPO prices.    With Covid-19 seeing a reduction in diesel consumption in Indonesia, however, Ng and Ravi believe that Indonesia will be able to continue with B30 at least in the near-term. The analysts estimate that Indonesia&rsquo s biodiesel uptake is &ldquo 13% below its targeted blend, at only 26.8% of its full-year allocated blending volume of 9.59 million kilolitres for 2020&rdquo . Indonesia will likely be  10% short of its biodiesel consumption target at 8.63m kilolitres as a result of the pandemic. 

  &ldquo We estimate BPDPKS may have spent Rp10.3 billion to fund the biodiesel programme from  Jan 1 to May 17 and probably has around Rp8.7 billion funds left over from 2019. Taking the Rp20.3 trillion requirement, less the remaining carry-forward from last year&rsquo s fund of Rp8.7 trillion and the latest additional funding of Rp3.54 trillion, BPDPKS will need to collect Rp8.1 trillion from export levies. Based on a blended export volume of 15.2 million tonnes and export levy of US$36/tonne, we estimate that there will be sufficient funds to meet the B30 mandate,&rdquo they reported.   

Ng and Ravi believe that CPO prices will benefit from the additional funding, as demand for biodiesel usage will be sustained by raising the country&rsquo s biodiesel usage to 8.63 million kilolitres from 6.26 million kilolitres in 2019. 

These improved prices will likely offset an increased US$5/tonne in export levies for upstream planters, with the analysts issuing a &ldquo neutral&rdquo verdict for such operations. The levy, however, will likely benefit downstream palm oil players by incentivising exports of processed palm oil products, with both analysts issuing a &ldquo positive&rdquo call for downstream players. 

Key Indonesia players with downstream exposure are Wilmar, First Resources and Golden Agri. As of the lunchtime close today, Wilmar International is currently trading at $3.89, First Resources at $1.31 and Golden Agri at just $0.14. CPO prices yesterday stood at RM2140 ($698.10). 

 

 

SINGAPORE (May 14): Golden Agri-Resources (GAR) recorded a net loss of US$95 million (S$134.6 million), compared to last year&rsquo s earnings of US$18 million. The decline was mainly contributed from foreign exchange transaction loss.

Excluding net effect of net gain or loss from changes in fair value of biological assets, depreciation of bearer plants, exceptional items, foreign exchange gain or loss, and deferred tax expense or income, underlying profit came in at a loss of US$25 million.

Despite the disruption arising from the Covid-19 pandemic, GAR&rsquo s main food and biodiesel businesses have continued operating, as the palm sector is recognised as a strategic industry in Indonesia.

Revenue edged up 2% to US$1.66 billion due to higher average selling prices. The contribution was slightly offset by lower sales volume, which was affected by temporary logistics issues owing to the Covid-19-induced lockdown measures.

This quarter&rsquo s consolidated EBITDA was contributed by higher crude palm oil (CPO) market prices in 1Q20, as well as plantations and palm oil mills segment, although higher costs including the newly imposed CPO tax and levy in Indonesia resulted in the quarter&rsquo s 30% decrease to US$84 million.

The average international CPO (FOB Belawan) price for 1Q20 was 31% higher at US$672 per tonne, as compared to US$512 per tonne in 1Q19. On the other hand, GAR&rsquo s downstream business was impacted by higher input prices due to severe supply chain disruption.

Fruit yield for 1Q20 fell 24% on seasonality, and upstream palm product output dipped 2% to 615,000 tonnes.

Franky O. Widjaja, GAR Chairman and CEO, says, &ldquo In our view the CPO price is buffered from the decline in crude oil price because of staple demand for food usage, as history has repeatedly shown&rdquo .

&ldquo Although short-term volatility is expected with the current uncertainties of the COVID-19 outbreak, we believe the CPO price will recover once the pandemic subsides and inventories in consuming countries are replenished,&rdquo he adds.

&ldquo The limited growth in palm oil supply this year affected by the drought conditions and lower fertiliser application by small players in 2019 will keep the supply and demand balance healthy. Long-term fundamentals of the industry remain in place as palm oil is the most consumed vegetable oil with its high versatility and lowest cost of production,&rdquo says Widjaja.

Shares in Golden Agri-Resources closed 0.1 lower, or 0.7% down, at 15 cents on Wednesday, prior to the announcement.