Southeast Asian first-generation biodiesel will become increasingly insular in 2020, in the wake of the two biggest palm oil producers Indonesia and Malaysia hiking domestic production mandates in response to anti-palm oil sentiment from their previous largest export market Europe.
The EU's new renewable energy directive will phase out palm-oil based biofuels by 2030. Individual countries have already imposed their own restrictions because of environmental and sustainability concerns.
Europe also slapped 8-18pc anti-subsidy duties on Indonesian biodiesel in August 2019, effectively closing the arbitrage. While Jakarta has filed a complaint with the World Trade Organisation the matter could take years to resolve, much as it did when the EU imposed anti-dumping duties against it in 2013 that were only overturned in 2018.
As a result, Indonesia is switching to a 30pc (B30) biodiesel mix in transport as of 1 January 2020 from B20 currently. Malaysia will be phasing in a B20 mandate over the course of the year from its current B10 standard.
Mandates squeeze capacity
The increases will result in domestic biodiesel consumption hikes to around 8.47mn t/yr from 6.58mn t/yr in Indonesia and to 1.2mn t/yr from 700,000 t/yr in Malaysia, straining domestic producers' capacity and leaving little left for exports.
Indonesia has a domestic nameplate capacity of around 9.3mn t/yr, so producers will need to run at around 90pc to meet their requirements. There are plans to expand this to 10.4mn t/yr by 2021, but then Jakarta is also pushing to boost its blending mandate yet again to B40 the same year, which will mean all output will remain within the country.
Malaysia has 2mn t/yr of production capacity, so will have enough spare to maintain exports to Europe and China. But it could find foreign sales further hindered from the knock-on price effects on feedstock palm oil.
Malaysian biodiesel exports totalled 604,000t during January-September 2019, of which 172,000t went to China and almost all the rest headed to Europe.
Indonesian producers — which can operate more cheaply than their Malaysian counterparts because of economies of scale — sold more than 1mn t/yr during the same period. Of this, 54pc went to China and 45pc to the EU, as well as sporadic volumes to India and South Korea.
But while the opportunity to take market share is there for Malaysian producers, higher palm oil costs are closing the arbitrage.
Rising costs complicate
Crude palm oil prices have increased from four-year lows of around $470/t on the fob Bursa Malaysia exchange in July 2019 to near three-year highs of more than $700/t in early December, as Indonesian biodiesel producers increased production in preparation for B30. The trend may only continue as the new policy gets under way and Malaysia begins to phase in B20.
Europe may continue buying PME given higher mandates coming in during 2020. But the biggest market loss will likely be China, which has no biodiesel directive and so only buys if it makes economic sense when palm oil values are around $120/t below that of gasoil.
But the price hike has shifted the spread between palm oil and gasoil from -$140/t in July 2019 to more than $120/t in early December, killing off any PME demand.
A severe slump was already seen at the end of the July-September 2019 quarter, when Indonesian exports to China dropped from 187,000t in July to just 52,000t in September, while Malaysian sales ceased completely in August and September from 50,000t in July.
Waste takes up slack
The lack of cheap PME has been causing Chinese oleochemical manufacturers to bid up homegrown used cooking oil (UCO) feedstock, so forcing up export prices of the feedstock and finished UCO methyl ester (Ucome) biodiesel to Europe.
Tightening UCO supplies in China have pushed bulk export values up by $140/t since June 2019 to $725/t in early December, while Ucome rose higher to $1,025/t from $830/t over the same period.
Suppliers have been further encouraged to keep raising offers as values in Europe have hit their highest levels since Argus records began in August 2013, reaching more than $1,410/t fob ARA.
Demand for UCO and Ucome will remain firm as European targets continue to rise in 2020 and waste grades count double towards mandates, although some traders question how high buyers will follow increasing offers out of China.
Chinese biodiesel exports hit a record high 72,000t in July 2019 compared with 50,000t a year earlier. This fell off to 41,000t by October but this was still more than double the exports recorded during the same month in 2018.
UCO sales managed a record 88,000t in August 2019 against 67,000t for the same month in 2018, although this eased off to 68,000t by October as it was during the same month in 2018.
To meet higher mandates and combat rising China prices, European buyers are looking elsewhere for waste feedstocks, particularly southeast Asia where Indonesia and Malaysia remain relatively untapped for their UCO potential, as well as palm oil mill effluent (POME).
But UCO infrastructure will take time to build, and while POME volumes are rising it remains a risky prospect for many as product quality can vary greatly.
By Amandeep Parmar
