Indonesia's biodiesel mandate rollout to be gradual

December 18, 2024 (MLN): Indonesia's plan to expand its biodiesel mandate from January 1 has raised concerns about its potential impact on global palm oil supplies, as Reuters reported.

Analysts suggest the implementation is increasingly likely to occur gradually, as industry participants advocate for a phased approach.

Indonesia, the world's largest producer and exporter of palm oil, plans to increase the mandatory mix of palm oil in biodiesel from 35% to 40%, a policy known as B40.

This move has already triggered a surge in palm oil futures and may further impact prices in 2025.

The government of President Prabowo Subianto has repeatedly stated that the plan is on track for a full launch in the new year.

However, industry watchers argue that costs and technical challenges are likely to lead to partial implementation before full adoption across the sprawling archipelago.

Indonesia's biggest fuel retailer, state-owned Pertamina, said it needs to modify some of its fuel terminals to mix and store B40.

The modifications will be completed during a "transition period after the government establishes the mandate," spokesperson Fadjar Djoko Santoso told Reuters, without providing details.

During a meeting with government officials and biodiesel producers last week, fuel retailers requested a two-month transition period.

Ernest Gunawan, secretary general of the biofuel producers association APROBI, who was in attendance, told Reuters.

Hiswana Migas, the fuel retailers' association, did not immediately respond to a request for comment.

Energy ministry senior official Eniya Listiani Dewi told Reuters the mandate hike would not be implemented gradually, and that biodiesel producers are ready to supply the higher blend.

"I have confirmed the readiness with all producers last week," she said.

APROBI, whose members produce fatty acid methyl ester (FAME) from palm oil to be mixed with diesel fuel, said the government has not issued allocations for producers.

These allocations, which allow them to sell to fuel retailers, are typically issued by this time of the year.

"We can't deliver the goods without purchase order documents, and purchase order documents are obtained after we get contracts with fuel companies," Gunawan told Reuters.

"Fuel companies can only sign contracts after the ministerial decree (on biodiesel allocations)", Gunawan further added.

The government plans to allocate 15.62 million kilolitres (4.13 billion gallons) of FAME for B40 in 2025, Eniya told Reuters, less than its initial estimate of 16mn kilolitres.

For the government, funding the higher blend could also be a challenge as palm oil now costs around $400 per metric ton more than crude oil.

Indonesia uses proceeds from palm oil export levies, managed by an agency called BPDPKS, to cover such gaps.

In November, BPDPKS estimated it needed a 68% increase in subsidies to 47 trillion rupiah ($2.93bn) next year and estimated levy collection at around 21tr rupiah, fuelling market speculation that a levy hike is imminent.

However, the palm oil industry would object to a levy hike, said Tauhid Ahmad, a senior analyst with think-tank INDEF, as it would hurt the industry, including palm smallholders.

"I think there will be a delay, because if it is implemented, the subsidy will increase. Where will (the money) come from?" he said.

Nagaraj Meda, managing director of Transgraph Consulting, a commodity consultancy, said B40 implementation would be challenging in 2025.

"The implementation may be slow and gradual in 2025 and probably more fast-paced in 2026," he said.

Prabowo, who took office in October, campaigned on a platform to raise the mandate further to B50 or B60 to achieve energy self-sufficiency and cut $20 billion of annual fuel imports.

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