Nusa Dua. Indonesia's B30 biofuel plan, which will become effective at the beginning of January next year, will further increase domestic consumption of palm oil and prop up the price of the commodity, analysts said.

The average palm oil price has rebounded to $650 per metric ton this year from a decade-low of $507 per ton last year, according to the Rotterdam benchmark price, which includes cost, freight and insurance.

"The forecasts are averages for January to June 2020. Palm oil prices could temporarily rise to between $650 and $700 [per ton]," Thomas Mielke, an analyst and editor of World Oil, said during a panel discussion at the 15th Indonesian Palm Oil Conference in Nusa Dua, Bali, on Friday.

"Palm oil is the dominant vegetable oil on the import and export side. It can hardly be replaced. Any small drop in palm oil export supply – which could occur if Indonesia enforces B30, or production is decreased by 1.5 million kiloliters – will be a problem in the world market," he said, referring to the government's plan to increase the mandatory palm oil-based content in all diesel sold in Indonesia to 30 percent, from 20 percent currently. 

He said Indonesia would require an additional 2.6 million tons of palm oil to fully implement B30, which would increase consumption by 7.7 million tons in 2018-2019. 

Mielke said the global supply and demand balance was expected to tighten this year and next year, as only 78.2 million tons will be produced, while consumption is about 80 million tons.

Dorab Mistry, a veteran analyst and director of Indian consumer goods company Godrej International, said drought and reduced planting in new areas are significant factors leading to lower production in Indonesia in the short term. 

"At present, I am cautiously estimating higher 2019 crude palm oil production in Indonesia but by a mere 1 million tons. For 2020, I am not optimistic about palm oil production in Indonesia. The lower planting of new areas will combine to give us production growth of just 1 million tons," Mistry said.

At the Mercy of B30

"If Indonesia implements B30, it will create tightness in the market, making it hard for the country to increase its exports to importing countries," Mielke said.

"Indonesia has a responsibility to satisfy consumers' requirements. We shouldn't forget that there are consumers in Africa and Asia who are dependent on Indonesian palm oil," he added.

Mistry said the B30 program was a game-changer in the market, which started to ration supplies as it expects higher prices. He called on the government to be flexible in setting the minimum palm oil content under the program to relieve pressure on the market.

"Indonesia must have a self-correcting mechanism that allows reducing the palm oil content of biodiesel," he said, adding that the government should also focus on production to maintain balance in the market.

"Concentrate on plantations and make sure production continues," Mistry said.

Mielke said the replanting program, launched in October 2017 and targeting 180,000 hectares, is crucial and should be the government's medium-term focus.

"If it is not accomplished in five years, all industries, including smallholders, will be in trouble. The industry is determined by how Indonesia manages its biodiesel program, so Indonesia must ensure that production is under control," he said.

Djoko Siswanto, secretary general of the National Energy Committee (DEN), said the government's replanting program would maintain production and expand it to more areas.

"We will expand to former mining areas, so there would be no problem [with production]," he said.

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