How Wilmar could benefit from Indonesia's latest biodiesel policy

But there are some risks.

According to CIMB, Indonesia's plan to raise biodiesel usage to B10 as part of its measures to reduce its current account deficit is good news for regional planters and Indonesian biodiesel producers.

CIMB noted that Wilmar will benefit from this policy through higher local biodiesel sales and better CPO price.

It owns seven biodiesel plants in Indonesia with an estimated total capacity of 1.8m tonnes at end-2012. It has
183,518ha of palm oil estates in Indonesia as at 30 June 2013

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We estimate that this could raise Indonesia’s biodiesel consumption by 1.26m tonnes, which is positive for CPO price (benefiting regional planters) and Indonesia’s biodiesel producers (Wilmar and First Resources).

We expect this news to keep CPO price firm during the high production season. We remain Neutral on the sector, with Wilmar, First Resources and IOI being our top picks.

What Happened
On Friday, the Indonesian government announced plans to reduce oil and gas imports by raising the proportion of biodiesel in fuel from 7.5% to 10% while also making the blending of fuel mandatory.

This measure is aimed at reducing the country’s current account deficit.

What We Think
This is positive for the biodiesel industry in Indonesia and CPO price.Preliminarily, we are looking at a 1.26m tonnes increase in Indonesia’s consumption of CPO if the 10% blend is implemented.

According to a USDA report, Indonesia consumed around 670m litres of biodiesel in 2012, equivalent to 3.93% of total diesel used by the transportation sector.

We estimate that if the blend is successfully raised to 10%, usage of biodiesel in transportation sector alone will increase to 2bn litres, equivalent to around 4.5% of Indonesia's annual CPO production.

But there are constraints in implementing B10 in Indonesia, the key ones being logistics (high cost of inter-island shipping, engine warranty from manufacturers, biodiesel blending facilities), enforcement and pricing. As such, we expect a gradual pick-up in Indonesia’s biodiesel consumption.

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