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UALA LUMPUR: Biodiesel may be a feasible option to help slash Malaysia’s huge palm oil stockpile, according to leading industry analysts. However, competitive crude oil prices may remove a bullish factor for palm oil.
The use of crude palm oil (CPO) for biofuel will help reduce the stock overhang in the market now, said leading palm oil analyst Dr James Fry, chairman of LMC International Ltd, at the Palm and Lauric Oils Conference & Exhibition 2013 yesterday.
“If CPO price falls below the Brent crude floor, it starts to become profitable to use palm methyl ester (PME) without any need for government subsidies, with PME traded as a direct alternative to fossil diesel,” he said in his presentation.
CPO and Brent price trends have correlated strongly since around 2007, with CPO trading at an average US$200 per tonne premium to Brent.
However, since January the gap had narrowed so much that CPO traded at a discount to Brent at one point.
According to leading industry analyst Dorab Mistry, director of Godrej International Ltd, Brent should trade at about US$90 to US$110 per barrel in 2013.
“If I were Petronas or Pertamina today, I would be rushing to buy local CPO for blending with diesel, so as to hold down the costs of supplying motorists with their diesel,” Fry said.
PME is an adequate substitute fuel for diesel, and is cheaper than any liquid form of fuel, he added.
“These things have been working in favour of more palm oil being taken off the market as fuel without any talk of mandates. This is free market working,” he said.
According to Fry, the market in Indonesia has begun to see such trends but nothing similar has happened in Malaysia yet.
“There is a huge opportunity in PME here [in this region], particularly in Indonesia. There is a great opportunity for Malaysia, but its infrastructure will only be ready in 2014,” noted Mistry.
“In Indonesia the infrastructure is ready, so there will be an increase in PME in Indonesia and there are mandates going up in other countries. All things put together, biodiesel demand in 2013 will expand by one million tonnes,” he said.
This is against the backdrop of global biodiesel demand which shrank by two million tonnes in 2012.
“The biggest new factor is the emergence of US as a major crude oil producer. This is a game changer for energy prices. The US is expanding its crude oil output by about one million barrels a day each year,” Mistry said.
As the market for Brent crude becomes more competitive, the sector becomes less bullish on prices, he said.
“This has a direct effect on the biggest bullish factor for palm oil — biodiesel,” he said.
“With energy price outlook moderating, Western governments are going cold on biofuels. … These countries are quietly decelerating their biofuel programmes as we have seen in Spain in the last few days.”
This article first appeared in The Edge Financial Daily, on March 7, 2013.

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