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Informist, Tuesday, Aug. 5, 2025

 

MUMBAI - Indonesia's ambitious plan to achieve 50% blending of palm oil with fossil fuels (B50) by 2026 has created concern among palm oil importing countries such as India, but some observers believe that the Southeast Asian country may not find it easy to meet its goal. While palm oil supply may not pose a problem, it may face significant operational and financial hurdles, according to BMI, a unit of Fitch Solutions.   

 

In May, the Indonesian government announced a plan to divert 5.3 million tonnes of crude palm oil from exports to B50 production, implying a reduction in exports from 26 million tonnes in 2024 to 21 million tonnes in 2026. "We anticipate that the positive production outlook and supportive government policy will provide strong feedstock availability for B50 production," BMI said in a report. Indonesia has fixed a target of 40% biofuel blending for the current year.

 

However, palm oil importers like India may feel the supply crunch due to higher blending mandates in Indonesia.

 

BV Mehta, executive director, Solvent Extractors' Association of India, had in a recent interview with Informist expressed the concern. "Before 2025, the world used to produce about 263 million tonnes of vegetable oil, of which 53 million tonnes was used for biodiesel. Now, with the Trump policy about converting soybean oil into biofuel, that may absorb about 5 million tonnes to 6 million tonnes."

 

"If Indonesia decides to move from 40% to 50% of vegetable oil for biodiesel blending, then it will absorb another 3 million tonnes. So this adds up to 8-9 million tonnes. Even if 50% of it is used for blending, then your food basket will get disturbed. Since we import 60% of our requirement, naturally, if international prices move upward, our prices too will move accordingly," he added.

 

However, according to BMI, "Despite Indonesia's position as the world's largest palm oil producer and exporter, we expect Indonesia to face significant operational and financial headwinds in achieving the B50 goal by 2026."

 

One of the challenges relates to biofuel manufacturing capacity. In March 2025, Aprobi, the Indonesia Biofuel Producer Association, had reported, as per BMI, that the biofuel industry in Indonesia utilises an average of 85% of installed capacity.

 

While achieving the B50 target would require 19 million kilolitres of capacity, the industry currently has 19.6 million kilolitres of capacity. This leaves minimal buffer and would mean significantly straining existing capacity. The country needs five large-capacity biodiesel plants to support the B50 rollout, with only three under construction, the report said, quoting official data.

 

The B50 target also faces financial problems. Currently, the Indonesian government subsidises the cost difference between palm oil-based fuel and fossil fuel, and the palm oil replanting programme, using export levies collected from palm oil exports. To meet the funding gap, the government, in May 2025, announced an increase in the export levy on crude palm oil from 7.5% to 10%, and on refined palm oil products from 4.75% to 9.50%.

 

"While raising export levies may support the expansion of biofuel programmes in the short term, we expect that this approach will not be sustainable in the long term, as it could undermine Indonesia's palm oil competitiveness and hurt smallholder farmers," said the report. "Moreover, should Indonesia continue to divert exports toward domestic biofuel feedstock demand in seasons of tightened supplies, revenue from export levies would be further constrained," it added.

 

Moreover, the report points out, Indonesia has experienced low palm oil replanting rates in recent years. Since 2016, the Indonesian government has encouraged replanting of old tress by distributing annual subsidies, but success has been limited.

 

"We expect the global market to witness more frequent price shocks for palm oil, as Indonesia would likely restrict exports during poor harvests to fulfil domestic biofuel requirements," the report said.  End

 

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

 

Reported by Abhijit Doshi

Edited by Deepshikha Bhardwaj

 

 

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