How the B40 program affects CPO producers
High POGO spreads make blending biodiesel more expensive
With the gap between crude palm oil (CPO) and crude oil widening, blending biodiesel into diesel has become even more expensive. For every ton of CPO used for blending, the same amount can be exported and used to import crude oil, at a cheaper price. As of 29 November 2024, the POGO (palm oil and gas oil) spread stood at USD459/ton, the highest since 2022. The main reason for the high spread is the high price of CPO given the ongoing CPO undersupply in Indonesia – an after-effect of the El-Nino cycle that ended in 2H23. At current spread levels, we expect the BPDP KS (Badan Pengelola Dana Pertanian Kelapa Sawit) to incur an expenditure of IDR76.9tn/year and generate revenue of only IDR20.6tn/year, based on the current levy rate.
B40 burden will likely be absorbed by CPO companies
CPO companies are likely to bear the economic losses in biodiesel. The additional amount required to subsidise fuel is paid by the BPDP KS (the CPO fund), which receives funds from the tax levy imposed on CPO and CPO derivative exports. As the B40 program is likely to increase 2025 CPO consumption (for biodiesel blending) to up to 13.4mn tons from an estimated 11mn tons in 2024, the B40 program will likely increase CPO prices even further. With volumes and spreads increasing, the increase in subsidy expenditure will likely have to be covered by way of an increase in levy.
Levy would need to be hiked by 15% to maintain B40 program at current spreads
The current export levy for CPO is divided based on how downstreamed the process is. Te rate is 7.5% for CPO, 6% for olein, and 4.5% for RBD (refined, bleached, and deodorized). Assuming the diesel and biodiesel spreads stay at their November values of IDR 5,000/l, and 13.4mn tons of CPO would be consumed for biodiesel, we estimate that the levy would need to be hiked by 15%, across CPO, RBD, and olein.
B40 is not as good as perceived
At first glance, B40 seems positive for CPO companies as it may elevate local demand, driving up CPO prices. However, once levy adjustments are factored in, it becomes clearer that this hurts CPO companies and farmers as a higher levy means they would have lower ASP and margins. If this trend persists, it may discourage replanting and lead to future production shortages. This would be a negative for Indonesia, as well as CPO producers, in our view.
Potential for significant upside if alternative sources of funding is found
If the BPDP KS were to find alternative sources of funding, apart from higher levy rates, we see significant upside potential for CPO companies. The B40 program would increase local demand thus increasing CPO prices, while maintaining the levy at a reasonable level.
Indonesia’s biodiesel mandate overview
Indonesia’s biodiesel mandate aims to blend diesel with Fatty Acid Methyl Ester (FAME), with a view to reducing fuel imports, boosting local CPO demand, and cutting down emissions.
The program first started from B1 in September 2008. The program was then upgraded, and first big leaps were made when Indonesiaintroduced the B20 in September 2018. The mandate was upgraded to the B30 mandate in January 2020. By February 2023, the blend rate was increased to a further 35% across all regions. Recently, the mandate has been further upgraded to a 40% blend staring in January 2025, with plans to increase the blend to a further 50% by January 2028.
Higher CPO premium relative to crude oil increases subsidy cost
To understand the economics of biodiesel, we need to understand the economics of the oil subsidy. Biodiesel is normally more expensive than crude oil, making it more expensive to subsidize. The more biodiesel we consume, the bigger the subsidy. Apart from volumes, we also need to consider the spread between biodiesel and crude oil. The higher the spread, the more expensive the subsidy. The optimal time to enact the biodiesel mandate is during high oil and low CPO environments.
The cost of the subsidy is absorbed by the BPDP KS. Biodiesel subsidy is the BPDP KS’ largest source of expenditure. In 2023, it accounted for IDR18,300bn of its total expenditure of IDR20,900bn. This subsidy is offset by the revenue the BPDP KS receives from the levy imposed on CPO exports. Historically, the levy structure has changed multiple times, to account for different market conditions, going from flat rates to progressive rates. The most recent levy structure is a flat rate on the CPO price reference. The rate is 7.5% for CPO, 6% for Olein, and 4.5% for RBD. The PK (palm kernel) levy rate is a flat USD25/ton. In 2023, the BPDP KS collected IDR39,500bn in levy from CPO and CPO downstream exports.
With a surplus of IDR37,600bn to end the year 2023, we estimate the BPDP KS to incur a deficit of IDR7,900bn, leading to a surplus of IDR29,700bn in as of end-2024, based on our estimates. To calculate how feasible the subsidy is going forward, we need to estimate the spread and volumes required.
B40 will cost an additional USD700mn compared to B35
Indonesia imported approximately 43.8mn tons of crude oil in 2023 for USD31.4bn at an average cost of USD717/ton. Indonesia also exported approximately 3.6mn tons of CPO for USD3.1bn in 2024 at an average selling price of about USD850/ton. Since 1 ton of CPO replaces approximately 1 ton of diesel, for every 1 ton of CPO Indonesia consumes domestically (and does not export), it imports 1 ton less diesel. Since CPO costs more than diesel, with the average gap being USD133/ton in 2023 and as high as USD188/ton in August 2024, Indonesia is effectively paying a price for energy independence. This is further supported in the POGO spread, a spread that calculates the difference between CPO price and crude oil price. Our POGO spread estimate has increased sharply in the past months and the B40 policy will only further increase this spread.
Expected levy collected
In 2023, Indonesia’s CPO exports were 26.1mn tons. We expect the B40 mandate to increase biodiesel consumption by 2.7mn tons from its 2023 consumption. Hence, we estimate Indonesia’s 2025 CPO exports will be 23.4mn tons. Historically, the breakdown of our exports is 15% CPO, 55% RBD/cooking oil, and 30% olein. This means that we estimate exports of 3.7mn tons of CPO, 7.4mn tons of olein, and 13.5mn tons of RBD. On the PK side, we expect PK exports to remain stable at about 4mn tons. As mentioned before, the levy for CPO is dependent on the CPO reference price. The rates are 7.5% for CPO, 6% for olein, and 4.5% for RBD. The CPO reference price as of 1 November is USD960/ton. The calculation for expected levy collected is shown below, using a CPO reference price of USD960/ton and CPO export volume of 23.4mn tons.
| % of CPO Export | Type | Tons Exported | Levy Rate | Levy USD/Ton | Levy (USD) |
| 15% | CPO | 3504330 | 7.50% | 72 | 252,311,760 |
| 30% | Olein | 7008660 | 6% | 58 | 403,698,816 |
| 55% | RBD | 12849210 | 4.50% | 43 | 555,085,872 |
| PK | 4000000 | - | 25 | 100,000,000 | |
| Total Levy | 1,311,096,448 |
With these calculations, we estimate a 2025 levy collected of USD1.31bn, or equivalent to IDR20,600bn.
BPDP KS will likely have a deficit in 2025, given current conditions
Due to higher spreads, higher volumes, and lower levy rates, we have calculated a net deficit of IDR56,300bn. With an assumed surplus of IDR29,700bn in 2025, our calculations lead us to believe that the B40 policy is only sustainable for six months before the BPDP KS runs out of money to finance the biodiesel subsidy.
At current POGO spreads, B15 is the highest blend rate we can achieve
Below is a scenario table of hypothetical spread along with the biodiesel blend, and how much it would cost to subsidize, how much revenue the BPDP KS would receive, and the income assuming the levy rate stays the same. Our calculation assumes Brent crude oil trades at USD70/barrel. The CPO reference price below is the equivalent CPO reference price estimated to achieve the spreads of 5,000, 4,000, 3,000, 2,000, 1,000, and 0 IDR/L assuming oil trades at USD70/barrel
| Subsidies (T Rp) | Spread | ||||||
| BX | 5000 | 4000 | 3000 | 2000 | 1000 | 0 | |
| 50 | 96.2 | 76.9 | 57.7 | 38.5 | 19.2 | - | |
| 45 | 86.5 | 69.2 | 51.9 | 34.6 | 17.3 | - | |
| 40 | 76.9 | 61.5 | 46.2 | 30.8 | 15.4 | - | |
| 35 | 67.3 | 53.8 | 40.4 | 26.9 | 13.5 | - | |
| 30 | 57.7 | 46.2 | 34.6 | 23.1 | 11.5 | - | |
| 25 | 48.1 | 38.5 | 28.8 | 19.2 | 9.6 | - | |
| 20 | 38.5 | 30.8 | 23.1 | 15.4 | 7.7 | - | |
| 15 | 28.8 | 23.1 | 17.3 | 11.5 | 5.8 | - | |
| 10 | 19.2 | 15.4 | 11.5 | 7.7 | 3.8 | - | |
| 5 | 9.6 | 7.7 | 5.8 | 3.8 | 1.9 | - | |
| Tax (T Rp) | CPO Ref Price | ||||||
| 960 | 872 | 785 | 697 | 610 | 522 | ||
| BX | 50 | 17.9 | 16.4 | 14.9 | 13.4 | 12.0 | 10.5 |
| 45 | 19.3 | 17.7 | 16.1 | 14.4 | 12.8 | 11.2 | |
| 40 | 20.6 | 18.9 | 17.2 | 15.4 | 13.7 | 12.0 | |
| 35 | 22.0 | 20.2 | 18.3 | 16.4 | 14.6 | 12.7 | |
| 30 | 23.4 | 21.4 | 19.4 | 17.4 | 15.4 | 13.4 | |
| 25 | 24.7 | 22.6 | 20.5 | 18.4 | 16.3 | 14.2 | |
| 20 | 26.1 | 23.9 | 21.6 | 19.4 | 17.2 | 14.9 | |
| 15 | 27.5 | 25.1 | 22.8 | 20.4 | 18.0 | 15.7 | |
| 10 | 28.8 | 26.4 | 23.9 | 21.4 | 18.9 | 16.4 | |
| 5 | 30.2 | 27.6 | 25.0 | 22.4 | 19.8 | 17.2 | |
| Surplus/Deficit (T Rp) | Spread/CPO Ref Price | ||||||
| 5000 | 4000 | 3000 | 2000 | 1000 | 0 | ||
| BX | 50 | (78.2) | (60.5) | (42.8) | (25.0) | (7.3) | 10.5 |
| 45 | (67.3) | (51.6) | (35.9) | (20.2) | (4.5) | 11.2 | |
| 40 | (56.3) | (42.6) | (29.0) | (15.3) | (1.7) | 12.0 | |
| 35 | (45.3) | (33.7) | (22.1) | (10.5) | 1.1 | 12.7 | |
| 30 | (34.3) | (24.8) | (15.2) | (5.7) | 3.9 | 13.4 | |
| 25 | (23.3) | (15.8) | (8.3) | (0.8) | 6.7 | 14.2 | |
| 20 | (12.3) | (6.9) | (1.4) | 4.0 | 9.5 | 14.9 | |
| 15 | (1.4) | 2.0 | 5.4 | 8.9 | 12.3 | 15.7 | |
| 10 | 9.6 | 11.0 | 12.3 | 13.7 | 15.1 | 16.4 | |
| 5 | 20.6 | 19.9 | 19.2 | 18.5 | 17.8 | 17.2 | |
Our scenario analysis in figure 6 shows the highest blending rate Indonesia can afford at current IDR5,000/L spread, and the levy rate is B15. If the spread were to normalize to historical level of IDR3,000/L (about 785 CPO reference price assuming USD70/barrel oil price), Indonesia would be able to sustainably afford a B20 blend.
Increasing blend rate may lead to higher levy and lower local CPO prices
We can see the economics of the biodiesel program: Levy must be further increased to support the biodiesel program, especially when oil is low while biodiesel is high. Increasing levy not only hurts big corporates, but also hurts the plasma farmers. 50% of CPO land in Indonesia is owned by plasma farmers, and a higher levy would only mean lower domestic prices and therefore lower income for farmers. Because of this, we would advise against raising levy rates to compensate for the deficit as it would hurt farmers. Apart from hurting farmers, companies are discouraged from replanting, which potentially leads to lower future production.
B40 is not as good as perceived
At first glance, the B40 program appears positive for CPO companies as it elevates local demand, driving up CPO prices. However, once levy adjustments are factored in, it becomes clearer that this hurts CPO companies as a higher levy means they would have lower ASP and margins. If this trend persists, it may discourage replanting and lead to future production shortages. This would be a negative for Indonesia, as well as CPO producers, in our view.
Alternative solutions to raising levy rates
Instead of adjusting levy or mandates, we suggest an increase in production. Currently, PTPN holds about 500k ha of land. With CPO seemingly at an undersupply, we suggest lifting the moratorium and allowing the government to increase their land size. If the Indonesia governmentcan reach 2mn hectares of land with a yield of 6 tons/ha, this is enough to sustain the biodiesel mandate up to B40. However, this is a long-term solution and does not solve the potential near-term shortfall, in our view. The downside to this is that there are ESG concerns behind further deforestation.
We could also explore options of having a flexible biodiesel program where we adjust our levy structure based on the CPO market conditions. We would increase our blend rate during over supply cycles and decrease them during undersupply cycles. The downside to this solution is the potential political backlash that may arise from it.
We also suggest finding other sources for funding through other government bodies, instead of relying solely on the BPDP KS. Increasing levy will not only hurt corporates, but also hurt the plasma farmers. This will discourage replanting even further which may lead to lower production in the future, decreasing Indonesia’s exports even further. Instead of directly increasing levy, a structure where export duty is decreased and export levy is increased may be less impactful to CPO producers, while still maintaining sufficient revenue to subsidize the biodiesel program.
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saya
Crude palm oil (CPO) prices have recently broken above USD1,000/ton this year,
