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Indonesia considers revised biodiesel subsidy pricing as output recovery looms

By Emily Chow

KUALA LUMPUR, March 8 (Reuters) - Indonesia is considering lowering the amount of biodiesel subsidy it provides per kilolitre to enable higher subsidized volumes of the biofuel, which counts crude palm oil as feedstock, an industry official said.

Indonesian has made it mandatory for all biodiesel to contain a minimum 20 percent blend of bio content in its so-called B20 programme, but not all biodiesel producers comply with the regulation as blending would incur higher costs at current oil prices.

Increased volumes of subsidized biodiesel could encourage more industry players in Indonesia to comply with the mandate to produce biodiesel.

The move could prop up demand for palm oil and support benchmark prices, which have fallen over 7 percent since the start of the year when it was trading around four-year highs. It was last down 1.2 percent at 2,859 ringgit a tonne.

Asked if Indonesia was looking at lowering the subsidy per kilolitre of biodiesel, Fadhil Hasan, executive director of the Indonesian Palm Oil Association, said discussions were taking place.

"There aren't many choices. Either you have to reduce the cost of processing biodiesel, or reduce the amount of subsidies (per kilolitre of biodiesel produced)," he said on the sidelines of a palm oil conference.

Indonesia, the world's top producer of palm oil, is pushing to increase usage of biodiesel to cut its oil import bill and curb greenhouse gas emissions.

Indonesia's subsidised biodiesel is used for transport purposes, while non-subsidised biodiesel is used in other industries.

RISING OUTPUT

Indonesia is aiming to increase its biodiesel consumption at a time when palm oil production is seen recovering from the lingering effects of a crop damaging El Nino, which reduces palm fruit yields and slashes output.

Hasan added that Indonesian palm oil output should start to recover by the second quarter of the year, with the bulk of yield improvements expected in the Sumatra region.

Indonesia is expected to produce 33 million tonnes of crude palm oil for the year, according to Hasan, while output of palm oil and its related products is estimated at 35.5 million tonnes in 2017.

Palm prices are seen weakening between now and the second half of the year because production levels are expected to recover when the effects of the El Nino wear off.

A Reuters survey showed Indonesian production likely declined to 2.95 million tonnes in January from 3.22 million tonnes in December.

(Reporting by Emily Chow; Editing by Richard Pullin)