Indonesia will ban palm oil plantation firms from using subsidised fuel from next month, an official at the Indonesian Palm Oil Association (GAPKI) said on Thursday, in a move aimed at reducing the strain on the country’s budget.
Costly fuel subsidies have made Indonesia’s pump prices the cheapest in Asia — at about half the market rate. The country spent about $18 billion on fuel subsidies last year and this is expected to rise to about $20 billion in 2013.
Since leaving prices at their current level threatens to increase the budget deficit and reduce the amount of money available for much-needed infrastructure spending, the government is now trying to reduce use of the subsidised fuel. It has already stopped government vehicles from using it.
“Starting on September 1, plantations cannot use subsidised fuel,” Fadhil Hasan, executive director at GAPKI told Reuters, adding the government regulation was issued before the association had time to give feedback.
Firms that may be hurt by the government’s fuel move include Wilmar International, PT Sinar Mas Agro Resources & Technology and PT Astra Agro Lestari.
“As logistic costs represent 14 percent of total production expense, the ban will adversely impact plantation companies if they do not increase their selling prices,” Jakarta-based brokerage Bahana Securities said in a report on Thursday.
Benchmark November palm oil futures on the Bursa Malaysia Derivatives Exchange were trading at around 3,000 ringgit ($960) per tonne on Thursday, down 5 percent so far this year.
Palm oil output from Indonesia, the world’s top producer, is expected this year to be between 23 million and 25 million tonnes, compared with 22.5 million in 2011.
India, China and Europe are the main buyers of Indonesian palm oil, with exports totalling 8.6 million tonnes during the first six months of this year.
President Susilo Bambang Yudhoyono’s Democrat Party has been trying to tackle the issue of costly subsidies in Indonesia — Southeast Asia’s largest economy — though the parliament earlier this year stymied its plans to lift the price of subsidised fuel.
