Widely used in Indonesia for cooking oil and applications
such as personal care and cleaning products, palm oil is an important sector in
Southeast Asia's largest economy with the industry employing millions of
workers. Indonesia is the world's largest exporter and it is the country's top
export commodity, apart from coal. Palm oil is similarly important in
neighboring Malaysia, the world's second-largest producer and exporter.
The benchmark crude palm oil (CPO) price in Malaysia ranged
from 3,500 ringgit (US$755) to 4,200 ringgit per ton between January and June.
That is compared to the all-time high in April 2022 of almost 7,000 ringgit per
ton, following the launch of Russia's invasion of Ukraine, which sent
prices of all edible oils skyrocketing. That run-up in prices for palm oil,
traditionally the cheapest among vegetable oils, was a continuation of one
caused by pandemic-related disruptions since late 2020.
"Elevated inventories in India and mainland China, an
expected increase in global soybean production through the 2023-24 season, and
the upcoming September-October period of peak palm fruit yields - all point to
downward pressure on prices through the remainder of 2023, BMI, a research unit
of Fitch Group, said in an August 15, 2023 note.
"Through the medium term, it remains our view that
average annual palm oil prices will continue to ease."
BMI forecast an average price of 3,800 ringgit per ton for
Bursa Malaysia-listed third-month palm oil futures contracts in 2023, down from
the average of 4,910 per ton last year. It also forecast prices will continue
to fall, reaching 2,400 ringgit a ton in 2027 -- on par with a five-year
pre-COVID pandemic average of close to 2,420 ringgit per ton.
The declines have hurt incomes of major palm oil producers
after many enjoyed record profits in 2021 and 2022.
In Malaysia, state-owned conglomerate Sime Darby Plantation
reported that second-quarter net profit fell by 54% to 380 million ringgit from
the same period in 2022. FGV Holdings, also government linked, saw its
plantation sector plunge 97% to 13.76 million ringgit, mainly due to the lower
average CPO price compared to the previous year and on top of lower CPO sales
and 37% higher CPO production costs.
In Indonesia, net income at top producers Sinar Mas Agro
Resources and Technology, Astra Agro Lestari and Salim Ivomas Pratama declined
85%, 54% and 71%, respectively, in the first half of 2023, to 284.3 billion
rupiah ($18.7 million), 367.6 billion rupiah and 128.4 billion rupiah.
Political issues also weigh on producers. A European
Union regulation on deforestation-free supply chains entered force on June 29,
2023. S&P Global said in August that combined with the EU's renewable
energy directive, which limits the use of palm oil for biofuel in EU markets
starting in 2030, the new law is "seen as another layer of restrictions by
palm oil producing countries."
Indonesia
and Malaysia account for about 85% of global palm oil trade while the EU is
typically the third largest importer after China and India. Indonesia, Malaysia
and the EU have reportedly agreed to form an ad hoc task force to hash out
issues related to the implementation of the deforestation regulation.
To deal with the market and political pressures,
Jakarta and Kuala Lumpur are seeking new ways to utilize the
commodity.
State-owned airline Garuda Indonesia in August announced the
start of a static test on a "sustainable aviation fuel," or
"bioavtur," on an engine used in its Boeing B737-800 NG fleet, with
ground and flight tests to follow. Garuda's bio jet fuel is jointly developed
by Indonesian state oil company Pertamina and the Bandung Institute of
Technology.
Also last month, Indonesia expanded its mandatory B35
biodiesel program -- produced by Pertamina -- nationwide, after a partial
introduction in February. B35 has a higher palm oil content in the diesel mix
than the B30 launched in early 2020. Indonesia is next targeting B40 for 2030.
Indonesia is pushing the biodiesel program expansion as palm
oil prices have fallen from the record highs. Malaysia is also exploring its
own biofuel efforts.
The Malaysian Palm Oil Board and state energy giant
Petronas signed an agreement in August to study using cooking oil and palm
oil waste as sustainable aviation fuel. In the second phase of the National
Energy Transition Roadmap launched late last month, the government included a
B30 biodiesel mandate on heavy vehicles by 2030 after rollout by
2025.
Yusuf Rendy Manilet, economist at Indonesian think tank
Center of Reform on Economics, sees Indonesia's biofuel policy as ultimately
viable.
"The government's goal is to reduce dependency on
imports of oil by leveraging biofuels in order to improve the trade
balance," Manilet told Nikkei Asia. "In the long run, with more
biofuels becoming available and oil imports reduced ... fuels will become more
affordable and lead to improving purchasing power."
BMI said increasing biofuels uptake could pose a "major
upside risk" to its price outlook for edible oils overall. "An
increase in the rate of diversion of palm oil to the manufacture of blended
biofuels -- or, the greater diversion of alternative edible oils, such as soy
oil, to biofuels - would tighten the supplies of edible oils for food
consumption."
It added that the developing El Nino weather phenomenon,
marked by drier and hotter weather in Southeast Asia, poses another major
upside risk to its palm oil price outlook over the next 12 to 18 months --
although "much depends on the eventual strength of the El Nino event
itself."
BMI said the 2014-16 El Nino, one of the most severe of
modern times, led to double-digit annual declines in percentage terms for crop
yields in both Malaysia and Indonesia over the 2015-16 season -which resulted
in palm oil prices rising by 1,000 ringgit per ton during the period.
