HOME AND AWAY. insight OCTOBER 2014

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1 ESTHER NG Editor, Agriculture Asia HOME AND AWAY Courtesy: Shutterstock Europe slammed its doors shut to Indonesian biodiesel last year after the European Commission hit Indonesia and Argentina with stiff anti-dumping duties, while China s consumption tax on diesel with less than 30% of palm methyl ester effected January 1 marked the end of that blended fuel trade from Southeast Asia to China. The anti-dumping duties meant that Indonesian cargoes would be prohibitively expensive Eur /mt ($ /mt) higher. But other doors opened for Indonesian biodiesel a new market emerged in China for bigger-sized, 100% biodiesel cargoes while Indonesia increased the biodiesel blend for subsidized diesel from B7.5 to B10. This pushed state-owned oil and gas company Pertamina to seek its increased requirements via tenders, last year and this year. Palm oil fruit transported from plantation to processing plant. The move by Indonesia was to trim its refined oil import bill after its current account deficit ballooned to $9.8 billion in the second quarter of 2013 the widest since the Asian financial crisis of the late 1990s. Shift in Chinese buying China has been importing biodiesel from Southeast Asia, mainly Indonesia, Thailand and Malaysia, since 2012, but as B2-B5 cargoes diesel blended with 2-5% PME. Traders on both sides of the South China Sea declared these cargoes as biodiesel in order to avoid paying 24

2 Chinese customs fuel consumption tax which, for gasoil, is Yuan 941/mt ($153.38/mt). It was a lucrative trade. The imported cost of the biodiesel blend was around Yuan 7,600/mt, while the average wholesale price for biodiesel was Yuan 7,700/mt in Guangzhou and the wholesale price for 100% diesel or gasoil was around Yuan 8,350/mt. The blended fuel was preferably sold as gasoil at the higher retail prices, eating into China s domestic gasoil market share. The imports of the cheaper blended fuel exacerbated an oversupplied gasoil market and forced state-owned oil companies to export excess gasoil. According to customs data, China imported 2.53 million mt of the biodiesel blend in 2013, up nearly 25-fold from 101,156 mt imported in China s 2013 gasoil imports fell 71% year on year to 270,000 mt, while its gasoil exports surged 50.3% year on year to 2.78 million mt. But on January 1, the Chinese government closed this loophole by levying Yuan 941/mt on these blended fuel cargoes with less than 30% biodiesel content. For a while in January, it appeared that the biodiesel trade was dead. Certainly, the B2-B5 trade was, but it heralded in a new trade: the B100. Instead of buying 3,000-5,000 mt PME, the Chinese started buying bigger parcels of 10,000-15,000 mt of 100% PME. The Chinese preferred Indonesian PME because it was some $30/mt cheaper than Malaysian product. The CHINESE PME IMPORTS (MT) five major Indonesian biodiesel producers and exporters are Wilmar International, Musim Mas, Permata Hijau Group, Ciliandra Perkasa and AAA Oils and Fats. In January, China imported 52,862 mt of PME, almost of all of it from Indonesia (see table), Chinese customs data showed. Imports fell to 25,499 mt in February but this was mostly because the Chinese were on holiday for two weeks for the Lunar New Year. Many Chinese workers return to their hometowns during this time. But trade resumed in March and April to slightly over 100,000 mt each month. Around this time, traders reported that their Chinese buyers had trouble getting letters of credit. The Chinese government s effort to rein in excessive lending at low inter-bank rates in December had finally caught up with the biodiesel trade. And this resulted in a 54% drop in imports to 48,331 mt in May. China s credit crunch In the years after the global financial crisis, an influx of hot money at low interest rates has given rise to a shadow banking sector in China YTD volume Jan 52,862 52,862 Feb 25,499 78,361 Mar 102, ,263 Apr 105, ,454 May 48, ,785 Jun 57, ,077 Jul 116, ,182 Aug 82, ,777 Source: China customs data OCTOBER 2014 insight 25

3 RESULTS OF FIRST PERTAMINA BIODIESEL TENDER Largely unregulated by the government, non-bank financial intermediaries are able to access these funds directly or through large state-owned banks at low interest rates. Arbitrageurs obtain short-term loans in the form of letter of credit, typically days, from these banks or agents with strong connections to banks by buying commodities. These commodity financing deals are not restricted to biodiesel, but include soybean, palm olein, rubber, zinc, aluminum and nickel. After receiving the LC, they would use the credit and re-loan it to an investor at a higher interest rate, making money on the interest spread. As for the agents, they would keep re-using the documents issued by logistic companies showing the ownership of the underlying asset a few times as long as the value is within their credit line, a trader said. Then in December last year, the Chinese government repeated what it 1,237,069 KL Discount (0.1 to 2.05%) to MOPS 0.25% gasoil assessment Musim Mas, Pelita Agung Agrindustri, Darmex Biofuels, Indo Biofuels Energy, Eterindo Wahanatama RESULTS OF SECOND PERTAMINA BIODIESEL TENDER 1,146,884 KL Discount (0.005 to 0.02%) to MOPS 0.25% gasoil assessment Wilmar International, Primanusa Palma Energi RESULTS OF THIRD PERTAMINA BIODIESEL TENDER around 600,000 KL 3% to MOPS 0.25% gasoil assessment Wilmar International, Darmex Biofuels did last June: It kept money supply tight and inter-bank borrowing rates went up. Lenders in the shadow financing sector were hit by more expensive credit. The effects of the credit crunch remain, but not tight enough as Chinese buyers continue to buy Indonesian PME spot cargoes all the way to December. About 70% of Chinese PME demand is driven by shadow banking, and the remainder for transport and power generation use, a trader estimated, though other sources say it is the other way around. Chinese customs data showed PME imports in May dropped by 54% to 48,331 mt, but were up 18.5% to 57,292 mt in June. The bulk of imports in June were from Indonesia and include 52,145 mt of PME and 5,138 mt of used cooking oil methyl ester from Hong Kong. Biodiesel traders point out that customs data do not always capture the large volume of biodiesel cargoes from Southeast Asia in bonded storage off the Dongguan, Yantai, Huangpu, Nansha and Zhanjiang ports. s of biodiesel from these tanks were Yuan 6,200/mt in August, which works out at $847/mt on an import parity basis, after deducting value added tax. There is no import tax on cargoes from ASEAN, of which, Indonesia is a member. Market sources had expected July and August import figures to be lower due to the tightening of credit lines in China. A number of traders said letter of credit openings for July were slower than usual. 26

4 But PME imports in July went up by a whopping % to 116,105 mt, customs data showed. Biodiesel traders said the hike in July imports were most likely trades done in June when the discount of palm oil against gasoil dropped from minus $130/mt in May to minus $ /mt in June. A POGO palm oil versus gasoil spread of minus $150/mt and greater starts to become attractive for both producers and buyers because it means that crude palm oil has become cheaper, and therefore so would PME. CPO, RBD (refined, bleached and deodorized) palm oil and RBD palm olein are feedstocks of PME. Overall, China has imported 590,777 mt from January to August. But not all of this demand for biodiesel is for credit financing. In the summer, the Chinese blend 35-40% of PME with gasoil for power generation in their factories. They also blend 10-15% of PME with kerosene to make diesel for bunker use, and with light cycle oil to increase heating value. Indonesia s oil demand Indonesia s oil production has decreased over the last 10 years and in 2004, Indonesia became a net importer of oil with imports growing further amid population and economic growth. Over time, the country s current account deficit widened to $9.8 billion in the second quarter of last year the widest since the Asian financial crisis of the late 1990s, prompting the Indonesian government to find ways to cut fuel imports. In September last year, it announced that it would raise the biodiesel content in subsidized gasoil to 10% from 7.5%. The move would reduce the country s foreign exchange bill on gasoil imports by at least $2.6 million/year, or by 3.5 million kiloliters/year (60,313 b/d), and absorb biodiesel exports which would have gone to Europe were it not for anti-dumping taxes. The government has set a biodiesel consumption target of 4 million kl for 2014, but the realization is currently only 54% of the target due to the lack of blending facilities, logistics and price. Pertamina had launched a tender last September to buy 6.6 million kl over When the tender was first launched, Pertamina only managed to cover 1.2 million kl. The price awarded was at a discount to the Mean of Platts Singapore 0.25% sulfur gasoil assessments on a CIF basis. This was the main reason why the volume was small, biodiesel traders said. Pertamina then re-issued a tender in December, securing only 1.15 million kl for this year. The price awarded was slightly under the MOPS 0.25% sulfur gasoil assessment. The tenders have been dogged by late payment although this could not be officially confirmed with the major exporters preferring to sell PME in the export market. In May, Pertamina issued a tender to buy 1.7 million kl for delivery to Sulawesi, Papua, Kalimantan and Nusa Tenggara. The results were released in September, and the state-owned oil and gas OCTOBER 2014 insight 27

5 company had secured around 600,000 kl, some 250,000 kl below market expectation. In total, Pertamina has secured 2.95 million kl of biodiesel for The government has revised Indonesia s biodiesel consumption target from 4 million kl to 2.3 million kl for Elsewhere, there has been some PME exported to the US, but these volumes are small compared to what goes to China. In August, for the second month in a row, the top origin for US biodiesel Elsewhere, there has been some PME exported to the US, but these volumes are small compared to what goes to China. imports was Indonesia at 34,974 mt, up 45% from the previous month. Traders attributed the surge in imports from Indonesia over the past few months to lower palm oil prices. Two producers from Indonesia are already registered with the US Environmental Protection Agency and would be capable of generating Renewable Identification Numbers if they used approved feedstock. Although palm oil has not been approved as an eligible feedstock to generate RINs under the US Renewable Fuel Standard, grandfathered biodiesel plants construction of which started prior to December 19, 2007 can assign RINs with a D6 code to palm oil-based biodiesel if they keep up with the appropriate documentation. Indonesian biodiesel could find more homes in the US if the blenders credit is reinstated. Qualified biodiesel producers or blenders are eligible for an income tax credit of $1/gallon of pure biodiesel (B100) or renewable diesel produced or used in the blending process. The tax credit expired in December last year. An attempt in May by the US to advance a tax extenders package that would have retroactively reinstated and extended for two years a $1/gal blenders tax credit for biodiesel and a $1.01/gal production tax credit for cellulosic biofuels, failed. A decision on the tax credit is not expected until after the US November mid-term elections. In the meantime, the new administration of Indonesian president-elect Joko Widodo is said to be committed to renewable energy and fulfilling the B10 mandate. But it faces a tough challenge of declining oil production, which means the government will have to import a huge volume of fuel to meet growing domestic demand. As Indonesia tries to meet its biodiesel blending targets, it will continue exporting biodiesel mostly to China. It s a win-win situation for both countries, just as long as the Chinese government does not clamp down too aggressively on shadowing financing. Market sources expect the Chinese government to strike a balance reining in excessive lending, though not too tightly as to crash the economy. 28