Indonesia biodiesel sector faces price squeeze

By Fitri Wulandari

JAKARTA (Reuters) - Confusion over pricing and a lack of incentives could hamper Indonesia's biofuels industry and dash its hopes to join the green fuels rush, domestic biofuel producers said.

Asia Pacific's only OPEC member subsidizes retail fuel prices, meaning biofuel has to compete with cheap subsidized fossil fuels. At the same time, the cost of the subsidy means less government cash is available for biofuel production incentives.

All this is against a backdrop of falling global diesel prices, against which biodiesel is priced, and rising costs of feedstock palm oil, that have slashed biodiesel margins across the region.

"When crude oil is down, the biodiesel price is also down as it is a substitute for diesel oil," Tutik Herlina Mahendratto, bio energy manager at plantation firm PT Bakrie Sumatra Plantations (UNSP.JK: Quote, Profile, Research, Stock Buzz), told Reuters.

His firm is constructing a 100,000 tonnes per year biodiesel plant, expected to come on stream by mid-2008.

"Without tax incentives, it will be difficult for biodiesel to compete with fossil fuel and the business will be unattractive," Tutik added.

Crude palm oil is currently quoted around $560 a ton in Belawan port, up from $395 a ton in late May. Crude oil prices have fallen from a record high of $78.40 per barrel in July to around $52 a barrel now, as mild weather in the United States curbs heating fuel demand.

SUBSIDISED PETROLEUM  Continued...