SINGAPORE (Reuters) — The world’s top palm oil producers may have to curb their biodiesel plans as tumbling crude oil prices render the edible oil twice as expensive as fossil fuels.
Indonesia expects to raise the minimum palm oil content of fuel in the country to 20 percent this year, while Malaysia has said it plans a 10 percent blend, up from the seven percent targeted last year.
They want to reduce vegetable oil stockpiles that have swollen to millions of tonnes as record global output meets faltering demand, as well as reducing emissions that damage the environment.
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However, industry officials and analysts said they were skeptical about both countries’ plans, with crude oil prices plunging to 12-year lows while palm oil gained 34 percent in the last quarter of 2015.
Indonesian government officials said they stood by their blending plan, while Malaysia’s plantations ministry declined to comment.
“I think both Malaysia and Indonesia will have to review their biodiesel mandates since both countries are also oil and gas producers and exporters,” said M.R. Chandran, a veteran palm oil industry official who works as a consultant in Kuala Lumpur.
“It doesn’t make economic sense the way oil prices are falling. Gasoil now costs just half of palm oil.”
A slowdown in a shift toward biofuel in Southeast Asia would likely pressure benchmark palm oil futures, one of the best performing commodities in 2015, as well as hurt efforts to rein in carbon emissions in the wake of a landmark global deal to combat climate change reached in Paris in December.
Analysts said the growing gap between palm oil and crude prices has increased the amount that the Indonesian and Malaysian governments would have to pay in subsidies to blenders as part of their efforts to move towards biofuel.
The new targets would require subsidies of more than $900 million in Indonesia and $260 million in Malaysia at current market prices, according to Reuters calculations based on the price spread between the two products.
Indonesian officials said most of the subsidies in their country could be funded by a $50 a tonne tax on palm oil exports, but some in the industry said that was unrealistic.
“The funds wouldn’t be sufficient to cover subsidies for the targeted volume,” said Fadhil Hasan, executive director at the Indonesian Palm Oil Association.
Added Chandran: “Subsidies are an issue for both Malaysia and Indonesia as the economic growth forecast is weak and currencies are under pressure.”
Analysts expect Indonesia to at best achieve a 10 percent mandate this year, while Malaysia’s blending level will likely fall below its 2015 goal of seven percent.
However, Indonesia’s government said it would meet its 20 percent blending target, dubbed B20.
“The most important thing is that government’s policy on B20 program is going to be implemented,” said Rida Mulyana, director general of renewable energy at Indonesia’s energy ministry.
The new biodiesel mandates are aimed at using up 3.4 million tonnes of palm oil stocks in Indonesia and close to one million tonnes in Malaysia.
Both countries are producing at just a fraction of their installed biodiesel capacity. Malaysia has set up plants to make 2.5 million tonnes of palm methyl ester or biodiesel a year and Indonesia can produce four to five million tonnes.
