Indonesia Biofuel Policy to Reduce Palm Oil Exports

By Claire Leow and Yoga Rusmana

Oct. 8 (Bloomberg) -- Exports of palm oil from Indonesia, the largest producer, may decline by as much as 1.5 million metric tons a year after the nation made the use of renewable energy mandatory, a government official said.

``In relation to the mandatory policy for bio-energy issued last month, we see that the use of agricultural products for alternative energy will increase,'' Bayu Krisnamurthi, a deputy to Coordinating Minister for Economic Affairs Boediono, said today in Jakarta. ``This will cut our exports'' of palm oil.

A fall in supplies from Indonesia, the top producer of the tropical oil, may help support prices that slumped to a two-year low this week on concern slowing global economic growth will dent demand for commodities.

The mandate is ``positive for the week'' for palm oil prices, said Tan Ting Min, a plantation analyst at Credit Suisse Group in Kuala Lumpur.

Indonesia said Sept. 26 diesel used for transportation must have minimum 1 percent biodiesel starting this month. The mix was set at 2.5 percent for industrial users. The nation also mandated 1 percent bio-ethanol mix for cars using subsidized fuel starting 2009, while industries using gasoline must ensure 5 percent of the fuel has bioethanol.

Fossil Fuels

Palm oil, with the highest calorific value of any vegetable oil, can be added to diesel to stretch supplies of fossil fuels. Brazil mandates the use of ethanol, made from sugar cane, in cars while the U.S. uses corn to make ethanol.

Indonesia's biofuel industry can produce between 1.3 million tons to 1.5 million tons annually, said Krisnamurthi. Capacity may double to 3 million tons by 2010, he said.

The country's palm oil output will be more than 19 million tons next year and exceed 20 million in 2010, he added. Food and chemicals industry may use 4.5 million tons this year and next, and 5 million tons in 2010, Krisnamurthi said.

Palm oil for December delivery is trading at 1,819 ringgit ($520) a ton on the Malaysia Derivatives Exchange at 4:14 p.m. local time. Prices have dived 60 percent from a peak in March.

Futures may average 2,900 ringgit a ton in 2009, compared with 3,226 ringgit so far this year, Credit Suisse's Tan said.

To contact the reporters on this story: Claire Leow in Singapore at cleow@bloomberg.net; Yoga Rusmana in Jakarta at yrusmana@bloomberg.net