Biofuel on the News

Wednesday, January 17, 2007

Indonesia biodiesel sector faces price squeeze

By Fitri Wulandari
Wed Jan 17, 2007 5:21 AM ET

JAKARTA (Reuters) - Confusion over pricing and a lack of incentives could hamper Indonesia's biofuels industry and dash its hopes to join the green fuels rush, domestic biofuel producers said.

Asia Pacific's only OPEC member subsidizes retail fuel prices, meaning biofuel has to compete with cheap subsidized fossil fuels. At the same time, the cost of the subsidy means less government cash is available for biofuel production incentives.

All this is against a backdrop of falling global diesel prices, against which biodiesel is priced, and rising costs of feedstock palm oil, that have slashed biodiesel margins across the region.

"When crude oil is down, the biodiesel price is also down as it is a substitute for diesel oil," Tutik Herlina Mahendratto, bio energy manager at plantation firm PT Bakrie Sumatra Plantations (UNSP.JK:
Quote, Profile, Research), told Reuters.

His firm is constructing a 100,000 tonnes per year biodiesel plant, expected to come on stream by mid-2008.

"Without tax incentives, it will be difficult for biodiesel to compete with fossil fuel and the business will be unattractive," Tutik added.

Crude palm oil is currently quoted around $560 a ton in Belawan port, up from $395 a ton in late May. Crude oil prices have fallen from a record high of $78.40 per barrel in July to around $52 a barrel now, as mild weather in the United States curbs heating fuel demand.


The government was not unaware of the problem, but budget constraints have tied its hands.

"Fuel prices in Indonesia are subsidized, thus cheaper than international prices. When biofuel surges above crude oil prices, the government is unable to increase the subsidy," said Alhilal Hamdi, the head of the National Team for Biofuel Development.

Producers are instead turning to exports, where they can sell their output at prices above those available in Indonesia's subsidized market.

About 80 percent of the country's biodiesel output would be exported, said Hamdi.
Surging production costs and low domestic biodiesel prices are being felt most by Indonesia's smaller biodiesel producers, who struggle to export and don't own palm oil plantations.

"Small producers have closed down their businesses. Big producers who buy raw material at a competitive price and export most of their products can survive," said Eka Bakti, director of PT Kreatif Energi Indonesia, a consultant firm for construction of biofuel refinery.

State oil firm Pertamina, which is retailing biodiesel made of 5 percent crude palm oil blended with 95 percent diesel oil, said its profit margin had shrunk since it began selling the green fuel in May 2006.

It buys raw material at 5,800 rupiah ($0.639) per liter, but sells biodiesel at gas stations at the same price as subsidized diesel oil of 4,300 rupiah per liter.

"We're still make profit, but profits from selling each liter of Biosolar is 85 rupiah lower than selling diesel oil," Hanung Budya, the company's deputy director of marketing said, referring to its biodiesel brand that is sold in 209 gas stations.

The government currently subsidizes biodiesel at the same level as fossil fuel, leaving Pertamina to cover the difference when biodiesel production costs exceed fossil fuel costs.

"We will expand it (biofuel production) if the government has a solution to Pertamina's shrinking profit," Hanung said.

Indonesia is expected to produce 750,000 tonnes of biodiesel this year, up from around 180,000 tonnes. Output is estimated to reach 1.2 million tonnes in 2008.

($1=9,072 Rupiah)

© Reuters 2007. All Rights Reserved.

Originally posted on Reuters ( )


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