September 3, 2007 (The Star) – An Inconvenient Truth by Al Gore is a timely reminder of our fragile ecosystem and the effect of global warming on everyday lives.Whether or not it is true, some Governments are acknowledging the potential threats arising from global warming and have taken measures to address this issue.
The need to secure renewable energy such as wind, solar, hydro, and biofuel is among top agendas.
Biofuel has potential for the widest reach, and is more economical than other alternatives. Bioethanol and biodiesel are the two most common biofuels used worldwide.
While palm biodiesel technology has existed for over two decades, it was never commercialised due to cost constraints – mainly due to raw material costs. This changed in the last two years with rising crude oil prices and the Kyoto Protocol to reduce greenhouse gas emissions.
These led to a surge in biodiesel demand, and oil palm has the potential to supply the bulk of the world’s biodiesel requirements.
The Government has issued over 90 biodiesel licences to spur investments into the country. Early last year, Malaysian entrepreneurs caught the biodiesel fever as there were fat margins to be made.
Palm biodiesel was selling for over RM2,500 per tonne while its major feedstock, palm oil, was trading at around RM1,400 per tonne, providing biodiesel suppliers with net margins of at least RM500 per tonne.
The Malaysian government issued over 90 biodiesel licences with a total capacity of over five million tonnes per annum to spur investments into the country.
However, currently, only six biodiesel plants are operating in Malaysia with capacities of 350,000 tonnes per annum.
The euphoria has fizzled out as palm oil prices skyrocketed by around RM1,000 per tonne over the last year, in anticipation of dwindling supply of global vegetable oils arising from biofuel demand.
Are palm biodiesel investments still viable?
The answer is a qualified no. The viability depends on three key factors: sustained high(er) fossil fuel prices, willingness of developed countries to continue tax subsidy programmes, and cheap raw materials.
As far as “tax subsidies” go, developed countries such as European Union members impose heavy diesel taxes whereas biodiesel is generally tax-exempt. This form of subsidy has provided cost advantages to biodiesel suppliers. With CPO trading at RM2,400 per tonne presently, we estimate the cost of producing palm biodiesel at RM3.00 per litre (incorporating a 10% mark-up and transportation costs to Europe). This compares to the cost of producing one litre of fossil diesel of around RM1.70.
However, with the imposition of fossil fuel taxes, the cost of fossil diesel rises to RM3.10 per litre, making palm biodiesel theoretically viable vis-à-vis fossil diesel (from a cost perspective).
However, in reality, palm biodiesel trades at about US$800 per tonne or RM2.40 per litre, leaving negative margins for biodiesel suppliers in Malaysia.
The differences could have been pocketed by intermediaries, or due to the preference of European buyers to use soy or rapeseed-based biodiesel over palm biodiesel.
From a biodiesel supplier’s perspective, the risk-return profile of biodiesel investment is unfavourable and full of uncertainties as the company has to contend with the vagaries in palm oil and fossil oil prices, and potential policy changes on tax subsidies by importing countries, as well as challenges posed by the non-governmental organisation on environmental issues.
Based on our estimates, palm oil prices need to fall to RM2,000 per tonne to make palm biodiesel investments viable again.
Judging from the anticipated tightness in global vegetable oil supply, palm oil prices are unlikely to fall below RM2,000 per tonne over the next 12 months.
However, we foresee palm oil prices coming under slight pressure to trade between RM2,200 and RM2,400 per tonne over the next few months as we enter seasonally high production months.
Nevertheless, there could be hope over the longer-term as Indonesia, with its aggressive expansion programme to open 300,000ha to 500,000ha of new oil palm plantations per year, could be the solution to making biodiesel investment a viable venture.
These additional supplies should be quickly absorbed for biodiesel requirements and we believe palm oil prices could be supported over the long term with a floor price of around RM2,000 per tonne.
Given the recent plantation stock price corrections, value is emerging among the small- and mid-cap stocks such as KL Kepong, Asiatic, TH Plantations, Tradewinds Plantation, Hap Seng Consolidated and CB Industrial.