Indonesia’s goal of boosting use of biodiesel made from palm oil by more than doubling subsidies is being threatened by the slump in crude prices.

Consumption of subsidized palm biodiesel may miss the 1.7 million kiloliter target for 2015, according to Derom Bangun, chairman of the Indonesian Palm Oil Board. The biggest producer of palm oil would need 1.5 million metric tons to meet that goal, he said.

That compares with 800,000 tons used last year, Mandiri Sekuritas, a broker in Jakarta, estimates.

The collapse of crude oil amid a global surplus has led a decline in fossil-fuel costs that’s cut the appeal of producing energy from plants.

Indonesia’s new government led by President Joko Widodo approved an increase in the biodiesel subsidy last month, spurring analysts including Mandiri to forecast the change would help to raise domestic palm oil use at a time of expanding output and weaker demand from buyers such as China.

“It’s a hard time for biodiesel producers,” Bangun said at the Jakarta headquarters of the group, which represents everyone in the industry from growers to makers of cooking oil and chemicals.

While the increase in the subsidy will add to the appeal of biodiesel, demand will be sluggish because of pressure from low crude prices, he said.

Palm futures on Bursa Malaysia Derivatives, where the benchmark contract trades, lost 16 percent to 2,352 ringgit ($649) a ton over the past year as Brent crude sank 44 percent to $62.22 a barrel.

Palm surged the most in four years on Feb. 5 after the subsidy increase to Rp 4,000 (31 cents) a liter from Rp 1,500. Prices rallied on Monday after China interest cut rates and the ringgit fell.

Indonesia has promoted biofuel usage to help absorb rising supplies of the world’s most-traded edible oil, which is used in foods and cosmetics, and to cut carbon emissions. Biodiesel is blended with regular diesel, produced from crude oil, for use as a transportation and industrial fuel.

The country in 2013 boosted the mandated amount of blending in diesel to 10 percent from 7.5 percent, and in 2014 ordered power plants to mix 20 percent.

The 1.7 million kiloliter target represents 10 percent of projected consumption of subsidized diesel, according to the Energy Ministry.

Total consumption of palm biodiesel may reach 2.2 million kiloliters this year if non-subsidized usage is included, the Indonesia Biofuel Producers Association estimates.

Biodiesel policies in Indonesia will help determine the direction of palm oil prices, which will climb if they are implemented in full, Godrej International director Dorab Mistry said in November. Mistry is due to speak at a palm and lauric oils conference in Kuala Lumpur on Wednesday.

“Biodiesel is uneconomical at the moment,” said Togar Sitanggang, secretary-general of the Indonesian Biofuel Producers Association.

Demand for subsidized palm biodiesel may be as low as 1 million kiloliters this year unless the government comes up with a new formula to set the prices used in buying tenders by the state oil company, Pertamina, he said.

The subsidy increase should make the B10 mandate feasible and boost palm oil demand by 900,000 tons this year, Hariyanto Wijaya, an analyst at Mandiri Sekuritas, a unit of Indonesia’s biggest bank by assets, said in a report on Feb. 5.

Indonesia may produce 31 million tons of palm oil this year, up from 29.5 million tons in 2014, according to Bangun.

“We will see just how far the government is committed in enforcing the B10 mandate,” Sitanggang said in a phone interview last week. “Everyone is waiting for the new price index to be immediately imposed in March.”

The new formula will be based on the price of crude palm oil plus biofuel production costs, said Dadan Kusdiana, bioenergy director at the Energy Ministry.

The government previously used the Mean of Platts Singapore, or MOPS, diesel price, plus 3.48 percent as a reference in tenders, he added.

“It will be hard to meet the 1.7 million kiloliter target with the low price of crude oil,” Bangun said. “The government may face problems delivering it.”

Bloomberg

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