New Formula to Set Biodiesel Price in Indonesia to Strengthen Biofuel Industry

Over the past four months the benchmark MoPS has been below USD $450 per ton, implying that Indonesian biodiesel producers have to absorb losses as palm oil prices are currently near USD $650 per ton. Association of Indonesian Biodiesel Producers (Aprobi) official Paulus Tjakrawan estimates that the losses that are incurred by Indonesian biodiesel producers (due to the low MoPS price) is about USD $900,000 per day. As a result, several biodiesel producers have lowered or stopped altogether their biodiesel supplies to state-owned energy company Pertamina. Good news is that the parliament’s Commission VII overseeing energy affairs last week agreed to implement a new formula for the formulation of the biodiesel price. This new benchmark will not be based on the MoPS but on current crude palm oil (CPO) prices. The formula will also include biofuel production costs (estimated at about USD $188 per day) as well as a three percent margin. Aprobi is convinced that one of the keys to foster a successful domestic biodiesel industry is this new benchmark price.

New formula: CPO + USD$ 188/ton) x 870 kg/m3.

The government’s mandatory biodiesel program (known as B10) was introduced in August 2013 when the mandatory content of fatty acid methyl ester (derived from palm oil) in biodiesel was raised from 7.5 percent to 10 percent. This new regulation was designed to limit costly oil imports (for domestic fuel use) which cause a wide trade and current account deficit. The mandatory content in biodiesel will be raised to 15 percent (B15) in September 2015, and to 20 percent (B20) in January 2016. However, the ambitious program has been plagued by several obstacles such as logistical and infrastructure hurdles, as well as recent sharply falling crude oil prices making biofuels a less attractive alternative. Aprobi also hopes that when the government implements the new benchmark biodiesel formula, Pertamina (the distributor of biodiesel in Indonesia) will follow this new benchmark as well, and not only for new tenders but also for contracts that were signed during the first two years of the program (2013-2014).

In 2014, Indonesia consumed a total of 1.7 million tons of biodiesel, far from the government target of 3.5 million tons. A problem was that Pertamina was late in opening tenders due to disagreement regarding the price. Meanwhile, exports of biodiesel are expected to decline to 1.4 million tons in 2015 (from 1.6 million tons in the preceding year) due to diminished demand from the Eurozone. However, Indonesia is eager to tap new markets for its biodiesel in China, India, Australia and the USA.

The government’s new biodiesel policy (higher subsidies and the implementation of the new formula) have boosted palm oil futures due to expected higher palm oil demand in Indonesia, the world’s largest palm oil producer. On the Indonesia Stock Exchange, listed palm oil producers saw their shares soar on Friday (06/02). On Monday (09/02), however, these shares declined due to investors’ appetite for profit taking. Still, these palm oil companies are expected to see stronger shares this week.

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