The end of cheap palm oil? Biodiesel demand surges, output stalls

Palm oil production growth rate drops from 7% to 1%

Indonesia increases biodiesel consumption and curbs exports

Palm oil prices soar in tight supply

Biofuel demand increases Vegoil prices

By Rajendra Jadhav, Bernadette Christina and Ashley Tang

KUALA LUMPUR/Jakarta, March 10 (Reuters) – Prices of edible oils can be boosted by stagnant production and biodiesel boost from Indonesia’s top producers over the years, which have made traditionally cheap palm oil more expensive, thus eliminating the advantage of competitor oil.

Palm oil is used in everything from cakes and fried fats to cosmetics and cleaning products, accounting for more than half of global vegetable oil shipments and is particularly popular among emerging market consumers led by India.

After decades of cheap palm oil, output is slowing due to the booming output and the battle of market share, Indonesia is using more biodiesel to make biodiesel, said Dorab Mistry, a respected industry analyst.

“The $400 discount per day is gone,” Mistry, director of Indian consumer goods company Godrej International, added. “As long as Indonesia continues to prioritize biodiesel, palm oil will not be cheaper anymore.”

Indonesia has increased its mandatory combination of biodiesel palm oil to 40% this year and will increase it to 50% in 2026 and next year’s jet fuel mix as it tries to curb fuel imports.

It is estimated that the biodiesel push will reduce Indonesia’s exports to just 20 million tonnes by 2030, a third down from 29.5 million tonnes in 2024, and Eddy Martono, chairman of Gapki, the largest palm oil association in Southeast Asia.

Jakarta’s biodiesel license, coupled with low production due to floods in proximity to Malaysia, has raised palm oil prices above competitors’ soybeans, prompting buyers to cut their purchases.

In India, crude oil (CPO) is the largest buyer of vegetable oil, which has been higher than crude soybean oil in the past six months, sometimes exceeding US$100 per ton. Until the end of 2022, palm oil will be traded at a discount of over $400.

Last week, Indians paid $1,185 for crude oil, up from less than $500 in 2019.

Higher vegetable oil prices may lead government efforts to control inflation, both in countries with palm oil and those relying on competitors soybean, sunflower and rapeseed oil.

Palm oil production, which has nearly doubled every decade from 1980 to 2020, has exacerbated criticism of deforestation to increase plantations.

During this period, average annual output grew by more than 7%, roughly in line with demand.

However, Malaysia’s palm oil production has stagnated more than a decade ago as the lack of new plantations and slow planting spaces, and concerns about deforestation have slowed growth in Indonesia.

Even in Indonesia, the supplementation of small farmers that produce 40% of the supply is still slow.

As a result, global production growth has slowed to 1% per year over the past four years.

Thomas Mielke, executive director of the Hamburg Forecaster Oil World, said that production growth could average 1.3 million tons per year over the current decade.

Mielke said production could lose more momentum due to labor shortages, the effects of aging plantations and the spread of Ganoderma fungi that cause yield damage.

Oil palm, which began to lose productivity after 20 years, needs to be replaced after 25 years, and new trees take three to four years to produce fruit, making the land without production until then, making farmers reluctant to plant it.

Plantation Minister Johari Abdul Ghani said in February that Malaysia has replanted 114,000 hectares (282,000 acres) in 2024, accounting for 2% of the total area of ​​plantation, with a target of 4 to 5%.

In Indonesia, slow replenishment makes yields lower as plantations age. Over the past decade, its crude palm oil production has dropped by 11.4% to 3.42 tons.

While palm oil production has increased from Colombia and Ecuador to countries like the Gate Coast and Nigeria, industry officials said new players are not growing at a high rate and demand is growing, especially biofuels.

Both Mistry and Mielke call on Indonesia to resume new permits for palm oil plantations, which was stopped in 2018.

“If Indonesia will pause the pause, there will be regular shortages and spells of palm oil prices,” Mistry said.

He added that the resulting production restrictions would make the 3 billion consumers in developing countries more expensive.

Shariman Alwani Mohamed Nordin, CEO of SD Guthrie International, said at a February industry conference in February that demand in key markets is already softening due to rising prices.

Industry officials said that although demand for chemical chemicals and biofuels has fueled the consumption of palm oil, consumption of palm oil will continue to grow.

“We are seeing an increase in demand for palm oil and because of limited land, we think there will be an imbalance in demand and supply,” said Harish Harlani, vice president of P&G Chemicals.

Sanjeev Asthana, CEO of Patanjali Foods Ltd in India, said higher palm oil prices could be wasted to boost demand shifts in rival oil.

“As buyers switch to soy and sunflowers, their prices have also increased,” he added. “In addition, these oils only have that much oil, so they can’t completely replace the palm oil position.”

(Reports by Rajendra Jadhav, Bernadette Christina and Ashley Tang; Editors by Tony Munroe and Clarence Fernandez)