08.11.2020 (www.fitchratings.com) - The Indonesian government may rein in its push to increase the use of biodiesel, as it now comes at a higher cost following a fall in crude oil prices and sustained strength in crude palm oil prices. Biodiesel is now much more expensive than regular diesel, and subsidies drawn from an industry fund to promote biodiesel production and use have been increasing. Rising biodiesel use in Indonesia was a key driver of global palm oil demand growth in the last three years and biodiesel sales form a significant share of revenue for many local producers. Fitch estimates that Indonesian biodiesel consumption in 2019 accounted for around 40% of the country’s total palm oil demand and 8% of global consumption. Indonesia’s biodiesel use target for 2020 implies a 50% jump and has been a key factor driving CPO prices since late-2019. Biodiesel Fund Depleting Fast: We estimate that the industry fund will be able to subsidise only around 8 million k) of biodiesel, compared with the government’s target of use of 9.6 million kl in 2020, in the absence of other measures. This suggests that Indonesia may miss its target for 2020. In addition, the outlook for biodiesel demand in 2021 and CPO export levies, which contribute to the fund, is uncertain. Potential Steps and Risks: We think the government may scale down its plans to increase biodiesel use in Indonesia, take steps to raise collections for the industry fund through higher palm oil export levies or trim subsidies given to biodiesel producers. These actions will not only affect such producers, but are also likely to affect CPO prices and the broader palm oil industry.