Plantations - Biodiesel launch in E. Malaysia
Recommendation: Neutral
We are positive on the commitment shown by the Malaysian government in pursuing its B7 biodiesel mandate with the launch of the biodiesel programme in Sabah, Sarawak and Labuan on Friday, despite the recent sharp drop in crude oil price, which makes it more expensive to use biodiesel than conventional diesel. We estimate that this programme could lift domestic palm oil consumption by 323,000 tonnes in 2015 but this represents only 1.6% of the country’s total production. As such, we do not expect the programme to move CPO prices significantly. We maintain our Neutral call, with First Resources, AALI and SIMP as our top picks in the sector.
What Happened
Plantation Industries and Commodities Minister Datuk Amar Douglas Uggah Embas revealed that 366 petrol kiosks in Sarawak, Sabah and Labuan will start selling B7 palm oil biodiesel at the end of Jan 2015. He added that the fuel, a blend of 7% palm oil biodiesel and 93% petroleum diesel, has been sold on limited basis in Sabah, Sarawak and Labuan since Dec 2014. “The fuel, which meets international standards, will use 138,000 tonnes of palm oil biodiesel a year,” he added at the launch of biodiesel B7 in East Malaysia. Uggah also said that the use of biodiesel B7 in Sabah, Sarawak and Labuan would increase the country’s total usage of the palm oil biodiesel to 576,000 tonnes per year, as the fuel had been fully implemented in Peninsular Malaysia. The Malaysian Palm Oil Board (MPOB) spent RM340m to build 35 petroleum depots nationwide to blend biodiesel. Five of them are located in Sarawak (owned by Petronas, Shell and Synergy), eight in Sabah (owned by Petronas, Shell and Petron) and two in Labuan (owned by Petronas and Shell). He said that the MPOB was studying biodiesel B10 compatibility by increasing the palm oil biodiesel content to 10% or more through the implementation of the palm oil biodiesel incentive scheme (IBS) in the industrial sector on voluntary basis.
What We Think
This is not a surprise as the government has indicated its plan to fully implement the B7 biodiesel program by end-Dec. We are positive on this news as it suggests that the government is committed to pursuing the country’s B7 biodiesel mandate, although it is currently more expensive to use biodiesel than conventional diesel due to the sharp correction in crude oil price to US$50 per barrel. The Malaysian government purchases palm biodiesel based on a RBD palm oil price plus RM515 per tonne formula, according to press reports. Based on this, we estimate that the current Malaysian biodiesel price is around RM2.38 per litre compared to current diesel retail price of RM1.93 per litre. This suggests that biodiesel costs RM0.45 per litre more than diesel at petrol pumps in Malaysia. The government pays subsidies to make up the difference between biodiesel and petroleum diesel prices. Assuming that the government achieves its biodiesel consumption target of 576,000 tonnes in 2015, we estimate that this would represent an increase of 323,000 tonnes in the country’s biodiesel consumption. However, the impact on CPO prices may not be significant, as this account for only 1.6% of the country’s total CPO production for 2014 of 19.7m tonnes.
What You Should Do
The Malaysian biodiesel programme will benefit plantation companies with biodiesel plant exposure, including Sime Darby, FGV, Genting Plantations, KLK and Wilmar. However, biodiesel earnings contribution to these companies is not significant. We maintain our Neutral rating on the sector.
Source: CIMB Daybreak - 19 January 2015