Should Malaysia review its Biodiesel policy
World production of biodiesel overview
World production of biodiesel forecasted to decline for the first time since 2015.
Leading producers are EU-28 and USA with forecast production in 2020 - 13.2 and 7.4 million tons respectively.
The overall annual change of 2.01 million tons mainly due to a major decline in EU - 1.57 million tons or 11% decline vs 2019
EU Biodiesel production overview
EU Biofuels Annual 2019: As a result of elevated imports and high stocks, EU FAME producers did not benefit from increased domestic consumption in 2018. EU produced FAME faced strong competition from domestically produced HVO and even more so from cheap FAME imports from Argentina (mostly soybean oil methyl ester, SME) and Indonesia (palm oil methyl ester, PME). As a result, EU FAME production decreased by 8%. The decreases were most pronounced in France, Germany, Italy, and Portugal. In contrast to the general downward trend, Spanish production increased, benefitting from export opportunities to other MSs, such as Italy, France and the Netherlands. HVO production increased less than forecast in last year’s report as projected start-ups for new plants in Italy and France were delayed.
As a result capacity use in 2020 forecast is at 41% - the lowest capacity use level on record.
Under the current conditions it seems that the EU will reduce usage of three vegetable oils as feedstock for biodiesel production even below projected levels.
Crude oil price fall
The biggest oil producers in 2018) are USA , Saudi Arabia and Russian Federation. Production in thousands of barrels per day in 2018:
- US 15311 (16.2%)
- Saudi Arabia 12287 (13.0%)
- Russian Federation 11438 (12.1%)
The 5-year-high price for Brent was registered in October 2018 - 84 USD barrel (612 USD/ton). Today crude oil prices fell down to 236 USD per ton and below (as of April 21 CFD Brent traded at 20 USD/barrel - 146 USD per ton).
Last time the price went this low in December 2001 and stayed at this level for less than a month.
Prospects of Malaysia biodiesel mandate B20
As of palm oil price we must note that FCPO exceeded 3000 RM per ton in January 2020 (730 USD/ton) and since then is in a sharp fall.
At the moment (21 April 2020) palm oil futures is heading towards 2000 RM/ton (500 USD/ton) and most likely will do it in the closest trade session.
This is not the first time when the price spat widened this much. The same situation was observed in 2016-2017 and before in 2010-2011. Back in 2016 Malaysia produced 0.50 million tons of biodiesel (Indonesia - 3.18 million tons) and in the fallowing 2017 Malaysia produced 0.72 and Indonesia - 2.97 million tons respectively.
What if the blending programs are temporarily halted
It is clear that under such circumstances the first and most obvious decision it to put the blending programs on hold at least are temporarily. But we must consider all the consequences which may come of it.
The first question is that in what extent this will impact the market price of palm oil and what do Malaysia do with the excess CPO? Production of palm oil in 2020 in Malaysia projected at the level of 19 650 thousand tons, which is almost 20 million tons.
In other words every 10 USD change in price caused by the decision to put the blending programs on hold may result in loss of tens of millions USD.
Having said that in 2019 Malaysia streamed 1.2 million tons of palm oil for biodiesel production we can conclude that the budget worth of funding subsidization program does not outweigh the possible losses of market price decline caused by the decision to put the programs on hold.
In that case it is better to utilize the subsidize funds in the way it was decided when the crude oil prices were high just to put a relief on the palm oil market in the times of sharp decline in prices.
Otherwise, it is highly likely that we may see new lows of palm oil prices as it happened to WTI Crude oil futures recently.