How Wilmar will benefit from Malaysia's B5 biodiesel order

New mandate rolls out mid-2014.

According to CIMB, Malaysia is on track to implement B5 by mid-2014 and B10 thereafter. A RM300m grant to build biodiesel blending and storage facilities and the proposed extension of the diesel subsidy to the biodiesel sector have been approved. There are also plans for the B5 and B10adoption to cover the commercial sector, which do not currently enjoys fuel subsidy.

CIMB noted that its key pick in the sector is Wilmar which is expected to be less affected by the weaker CPO price prospects as it derives most of its earnings from refining CPO products. 

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The main beneficiaries of this will be all the CPO players if the biodiesel mandate raises demand for CPO in Malaysia, resulting in lower stocks and
higher CPO prices. When B10 is fully implemented, we gathered that Malaysia could consume an additional 900k tonnes of CPO per annum, which is significant as it could cut the current inventory of 2.2m tonnes to as low as 1.3m tonnes.

This would boost CPO price prospects significantly.

However, given B10’s earliest possible timeline of July 2014 and the history of delays in implementation of the biodiesel mandate in Malaysia, we expect the potential stock drawdown to be gradual. As such, we are keeping our CPO price forecasts of RM2,530 per tonne for 2013 and RM2,700 per tonne for 2014.

We also expect local biodiesel producers to benefit from this as the mandate will raise demand for biodiesel, increase utilisation rates at their plants and improve the profitability of this business.

All the Malaysian planters under our coverage other than IOI Corporation, Hap Seng Plantations, and Jaya Tiasa own biodiesel plants. Wilmar International also owns a biodiesel plant in Malaysia while Felda Global Ventures is in the midst of acquiring a biodiesel plant.

However, we do not expect the potential earnings impact from the biodiesel plants to be significant for the players as the capacity of the plants are relatively small.