TSH: Indonesian Biodiesel Mandate Delay Reshapes Regional Palm Oil Outlook

Indonesia has opted to defer the rollout of its B50 biodiesel mandate, initially planned for 2026, citing significant technical preparedness challenges and persistent funding limitations. This delay underscores deeper structural issues within the country’s biodiesel program rather than mere timing setbacks. These challenges include the imperative to stabilise the domestic Palm Oil Plantation Fund (BPDPKS), narrow the widening cost gap between palm-based biodiesel and conventional fossil diesel, and enhance the supporting logistics and infrastructure necessary for a nationwide implementation.

Policy Challenges and Fiscal Pressure

The deferral comes amidst growing concerns over the adequacy of subsidy funding. Palm oil currently trades at a substantial premium over gasoil, widening the CPO Differential to Gas Oil (POGO) spread. This makes palm-based biodiesel significantly more expensive to produce than fossil diesel, necessitating considerable government subsidies to maintain stable pump prices. Reports of a fiscal deficit in 2024 and undisclosed updates on the BPDP fund’s balance for 2025 further exacerbate uncertainty regarding the long-term sustainability and timing of the B50 mandate. Biodiesel production in Indonesia remains structurally unprofitable without subsidies, implying that higher blending mandates would escalate subsidy requirements and heighten overall fiscal risk. Calculations suggest that funding just 50% of the projected 19.7 million kilolitres B50 allocation would require approximately USD1.73 billion in subsidies, a figure highly sensitive to even minor increases in per-tonne subsidy levels.

In a related development, the Indonesian government is also proceeding with plans to increase the palm oil export levy from 10% to 12.5%, effective March 1, 2026. This move is primarily aimed at bolstering fiscal revenues and supporting broader policy objectives within the palm oil sector.

Regional Competitiveness Shifts

The policy changes in Indonesia are set to reshape regional competitiveness. Malaysia, with its comparatively lower CPO export duties, maintains a significant cost advantage—estimated at approximately USD103.2/tonne—over Indonesia. This differential not only reduces the effective export cost for Malaysian producers but also provides them with greater flexibility in global pricing. Consequently, Malaysian exporters are better positioned to capture market share, particularly in price-sensitive markets such as India. Conversely, Indonesian exporters face a challenging trade-off between contributing higher levies, which fund domestic biodiesel subsidies, and maintaining their international price competitiveness.

Outlook and Recommendations

TA Securities maintains a Neutral stance on the Plantation sector. The investment bank anticipates CPO prices to moderate in 2026, averaging around RM4,000/tonne. Key upside risks to this sector recommendation include a lower-than-expected soybean supply from South America, a more robust demand recovery, reduced palm oil production, and significant reductions in production costs. For individual stocks within the sector, TA Securities recommends BUY for KLK (TP: RM23.09), TSH (TP: RM1.43), and UMCCA (TP: RM6.72). It advises HOLD on KIML (TP: RM2.47) and SELL on IOI Corp (TP: RM3.97) and SDG (TP: RM5.63).