Highlights

Implementation of the 10 percent biodiesel blend (B10) planned for July 1, 2016 has been postponed to the end of the year, but, realistically, Post believes it will likely be implemented in the first quarter of 2017. With full implementation of B10 in 2017, consumption is expected to reach 770 million liters next year. A 15 percent blend is expected for roll-out in 2020. Over the next few years, the expected continuation of higher blending rates, coupled with further growth in the size of the diesel pool, is expected to expand biodiesel use at a rapid rate. Malaysia is a net exporter of Palm Methyl Ester Biodiesel.

After several delays, nationwide availability of a 7 percent biodiesel blend (B7) began on January 1, 2015 intended for on road transport sector. Crude palm oil (CPO) is the feed stock. In 2015, with the national B7 mandate in force, some exports and no imports, biodiesel production was 550 million liters, up from 451 million liters annually under the 5 percent blend mandate the previous year.

The introduction of B10, originally scheduled for October 1, 2015, had been delayed due to resistance from key diesel vehicle manufacturers, claiming the 10 percent blend would have adverse effects on the engine and lubrication systems. Manufacturers claimed Palm Methyl Ester biodiesel could potentially damage the diesel engine injection system if the blend exceeds 7%. Interestingly, 95% of all vehicles on the road in the United States today are approved up to B20. This forced GOM to delay implementation of B10 mandate to the end of 2016. Realistically, with GOM's unreliable implementation record, Post believes the mandate will likely be implemented in the first quarter of 2017. To ensure consumer confidence and acceptance of B10 biodiesel, there are suggestions to offer both B10 and B7 at the petrol station (rather than solely B10), as is the case with petrol that offers the option of RON95 and RON97 petrol fuels. The GOM is not in favor as it will slow their efforts in promoting B10 biodiesel and reduce end stocks of CPO.

In addition, GOM extended the biodiesel mandate to the industrial sector that used boilers in their process, but at the blend rate of 7%. Malaysia ended fuel subsidies on December 1, 2014. Since then, the price of fuel is based on the rolling average price of crude oil during the previous month.

Ethanol is not produced in significant commercial quantities as costs are high.

Policy and Programs

The Government of Malaysia's (GOM) objectives were to use environmentally friendly and sustainable energy sources to reduce dependency on fossil fuels and to stabilize and boost palm oil prices. Under this plan, biofuels were to be produced for transport, industry, and export, and the GOM would develop home grown biofuel technology and second generation biofuels. In 2007, Parliament passed the Biofuel Industry Act, which included provisions for the Ministry of Plantation Industries and Commodities to implement a biodiesel blend mandate. However, this act excluded ethanol as the source of alternative fuels under the National Biofuel Policy.

Although the initial plan was to initiate B5 in 2008, it only began on June 1, 2011. Selected states in Peninsular Malaysia, Central region of Negeri Sembilan and Selangor were first to be introduced before gradually being introduced to the Southern region of Malacca and Johore on July 22, 2012, the northern region of Perak, Penang, Kedah and Perlis in October 1, 2013 and east coast states of Pahang and Kelantan on February 1, 2014. Full nationwide implementation covering both Peninsular and East Malaysia was achieved at the end of 2014.

Full implementation of the B7 blend, boost biodiesel consumption to 525 million liters in 2015. The B10 mandate was supposed to have been implemented on July 1, 2016, for the consumer transport sector (that covers both road and sea transport) but has been delayed to the end of 2016 (no specific date or month were given for the roll-out). Road transport constitutes nearly 80% of usage while sea transport takes up the rest. To further boost demand for biofuels, GOM also promotes the use of B7 biofuel for industrial sectors mainly as source of material to heat boilers and generate electricity. The roll-out of B7 biofuel for the industrial sector is expected to gradually take place starting on October 1, 2016. Full implementation of both B10 exclusively for on road sector and B7 for the industrial sector will lead to consumption of biodiesel to increase to 770.7 million liters as reported by the Ministry of Plantation Industries and Commodities in their press statement.

Implementation of B10 exclusively for commercial on-road and sea transport sectors and B7 for the industrial sector are seen as timely by the industry players as these will strengthen the price of CPO and reduce end stock of CPO. Even so, the roll-out was delayed as the Ministry of Plantation Industries and Commodities needed to consult with relevant automotive manufacturers about acceptance of B10 and with the Federation of Malaysian Manufactures about acceptance of B7 biodiesel for industrial usage.

It was unclear from the statement issued by the Ministry of Plantation Industry and Commodity if the major automotive manufacturers had been consulted as most expressed reservations about the 10 percent blend. Leading manufacturers even issued press statements claiming the higher blend above 7% could damage engines and that the availability in Malaysia of B10 could affect warranty coverage.

While GOM will need to assuage car manufacturers' concerns, they still have great hopes about the future of using CPO for biodiesel. The recently released Eleventh Malaysia Plan (2016-2020) includes a goal to have a B15 transport mandate by year 2020 for on road sector. No details on the implementation available during the press release, nevertheless automotive manufacturers are skeptical on the implementation as the usage of Palm Methyl Ester beyond 7% blending rate will cause problems to the injection system of the diesel engine.

Needless to say, distribution, quality control, safety and user education issues need to be overcome to successfully reach this level of biodiesel use in the diesel pool. The GOM needs programs to educate on the benefits of biodiesel and to dispel consumer concerns about the potential damage to the engine.

Gasoline and Diesel Markets

Sales of new vehicles in 2015 increased to 666,674 units, compared to 666,465 in 2014, a marginal increase of 0.03%. For 2016, the figure is forecast to drop for the first time since 2007 to 650,000 units. This was attributed to high financing cost, increased prices of new vehicles and difficulties in securing loans for new vehicles purchases. Incentives for hybrid vehicles which were introduced in 2013 and 2014 were discontinued in 2015. For Energy Efficient Vehicles (EEV), GOM has introduced a special tax incentive for locally assembled vehicles with engine capacity below 1,300 cc horse power, leading to the popularity of such small engine vehicles in Malaysia.

Gasoline powered vehicles remain the most common, accounting for 80 percent of new car sales. Diesel powered vehicles are growing slowly. Most diesel vehicles are trucks, buses, and pick-ups.

Aircraft movement in 2015 was 938,713 compared to 928,733 in 2014, a slight increase of 1.1% from 2014, partly attributed to the opening of the new low cost carrier hub while Malaysia Airlines downsizes its operation in the region.

Ethanol

There is no significant production of ethanol in Malaysia using biomass. Although there are initiatives to produce ethanol from palm oil mill effluent (POME), lack of advanced technology and high capital investment make it infeasible. In addition, difficulties in sourcing a constant supply of feedstock pose significant challenges. As such, ethanol is not used as a source for fuel, other industrial chemicals and even as beverages.

Biodiesel

Biodiesel supply and demand

Calendar Year

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Beginning Stocks

15

3

3

33

141

255

390

376

206

299

Production

186

247

127

188

271

513

451

550

833

960

Imports

0

0

0

0

0

0

0

0

0

0

Exports

198

247

97

54

32

190

95

195

210

250

Consumption

0

0

0

26

125

188

370

525

530

770

Ending Stocks

3

3

33

141

255

390

376

206

299

239

Balance Check

0

0

0

0

0

0

0

0

0

0

Production Capacity

Number of Biorefineries

20

20

20

20

20

20

20

20

20

20

Nameplate Capacity

2,880

2,880

2,880

2,880

2,880

2,880

2,880

2,880

2,880

2,880

Capacity Use (%)

6.5%

8.6%

4.4%

6.5%

9.4%

17.8%

15.7%

19.1%

28.9%

33.3%

Feedstock Use for Fuel (1,000 MT)

Crude Palm Oil

195

222

95

96

103

329

263

361

341

379

Market Penetration (Million Liters)

Biodiesel, on-road use

0

0

0

85

125

188

370

525

530

770

Diesel, on-road use

6,661

6,273

6,094

6,330

6,363

6,952

7,383

7,493

7,606

7,720

Blend Rate (%)

0.0%

0.0%

0.0%

1.3%

2.0%

2.7%

5.0%

7.0%

7.0%*

10.0%

Diesel, total use

10,247

9,651

9,376

9,738

9,789

10,695

11,358

11,528

11,701

11,877

Production

Production of biodiesel in Malaysia is still far below full capacity. Introduction of the B10 mandate accounted for the utilization rate at 33% which is way below industry full capacity.

Due to industry overcapacity and GOM's freezing issuances of new licenses for biofuel processing plant, Post foresees there will be no expansion in biofuel blending plant capacity in Malaysia, both in the short and medium terms. Some of the plants even converted to produce other olio-chemical products. Based on observation by Post and interviews with industry stakeholders, most of the biofuel plants in Malaysia operate below capacity. Nearly three-quarters of those biofuel plants registered do not produce biodiesel (Palm Methyl Ester), instead producing other oleo-chemical products such as fatty acids, fatty alcohol, soap noodles and glycerine.

As for the implementation of the B15 transport mandate by year 2020, the utilization rate of biofuel production capacity will still fall below 65% unless plants are decommissioned; plants are converted to the production of other products; or there is further growth in net trade surplus.

Consumption

The average national blend of biodiesel in Malaysia's transport diesel pool has steadily increased since 2011. From 1.3% in 2011 (where biofuel was only available in the central region of Negeri Sembilan and Selangor states), it increased to 2.0% in 2012 when biofuel was available in the Southern region of Malacca and Johore states. When the government fully committed to implement B5 program in 2014, it increased to 5% (nationwide implementation). After many delays, GOM introduced the B7 mandate in 2015, thus increased the national blend rate to 7%. The delayed introduction of B10 mandate from July 1, 2016, to the end of 2016, but probably sometime during the first quarter of 2017 means that for calendar year 2016, Malaysia's national blend rate is at 7.0% with consumption of 530 million liters. For 2017, the average blend rate is forecast at 10% with consumption forecasted at 770 million liters.

Although the government committed to implement B15 transport mandate in 2020, it is hard to judge if this goal will be reached because the government has not met past deadlines. For example, as previously noted, B10 blending which was supposed to occur on July 1, 2016, was reportedly postponed to end of 2016 due to objections by industry stakeholders. Realistically, Post believes it will only happen on the first quarter of 2017. Key to meeting higher targets is the availability of CPO at competitive prices (domestic and imported), and the readiness to import biodiesel during periods of feedstock scarcity. Also key is a stronger program to address distribution, quality control, safety and user education.

The delay in the implementation of B10 mandate from initially October 2015, to the end of 2016, was due, as stated, to concerns from vehicle suppliers about the alleged adverse impact of biodiesel on diesel engine performance. Several major vehicle suppliers issued press statements with scientific research. Although vehicle suppliers were against the 10% blend rate, GOM, nevertheless, proceeded with the B10 mandate, and it is uncertain who will take responsibility for any potential vehicle engine problems.

To ensure a successful transition to higher blending, the government needs to supply consistently high-quality fuels and educate consumers on the use of higher blends. Transparency in research finding and active engagement with industry players, mainly vehicle manufactures, biodiesel producers, fuel distributors and fleet managers, is the best way to ensure success.

Trade

Exports of biodiesel in 2015 increased to 195 million liters from 95 million liters in 2014. The increase was partly due to the Indonesian government's increased biodiesel consumption in 2015, hence, reduced Indonesian exports of biodiesel. In addition, there was a drastic drop in value of Malaysian currency relative to major trading currencies in 2015, making exports of biodiesel competitive and cheaper in terms of U.S. dollar. Thus, increased the quantity of biodiesel exported by Malaysia.

In 2015, Malaysia exported 65 % of biodiesel to Spain, 19% to the Netherlands and 11% to Switzerland. Exports for the first 5 months of the calendar year was 35 million liters which was slightly lower than 44.14 million liters recorded during the same period of 2015 (January thru May). These were due to strengthening of the Malaysian currency value and increase in price of CPO in recent months, compared to CPO prices recorded in 2015.

Stocks

There are no significant changes in stock. Stocks are calculated by balancing the production with exports and consumption to reflect current blending rate of the year.

Advanced Biofuels

Although research of second generation renewable fuels from palm biomass and biogas has been ongoing since 2002, product development has been hindered by lack of investment. In addition, the high cost of transporting the feedstock, and alternative usage of the feedstock for other high value items, such as pharmaceutical grade sugar, has so far, limited interest in advanced biofuels.