Surplus supply won’t keep palm oil from rising prices

Traders are bracing for a surplus of Indonesian palm oil. Tightening controls on illegal exports in the world’s largest producer have led to a drop in demand from European energy and transport companies, ProFinance reports, citing a study by the Financial Times.

Prices for the product fell from a 30-month high on the Bursa Malaysia derivatives exchange, the main benchmark for the global palm oil market. While a tonne cost more than 5,150 ringgit ($1,167) in December, the price fell below 4,200 ringgit ($966) in January. The decline was due to Indonesia’s decision to restrict exports of used cooking oil and palm waste.

Indonesia’s ban has added pressure to a market still adjusting to the effects of an EU initiative four years ago. The European Union then banned companies that consume large amounts of biofuel from using palm oil from areas where forests have been cleared. But some Asian exporters have been relabeling virgin palm oil as used cooking oil or mixing used oil with fresh oil, making the market less transparent, industry officials said. Indonesia’s trade ministry estimated that exports of palm oil residue and used cooking oil, two major by-products of the industry, grew by 21% between 2019 and 2023. Over the same period, crude palm oil exports fell by 25%.

“Overseas demand for waste feedstocks such as used cooking oil has increased sharply in recent years due to environmental and sustainability requirements in some importing countries,” the study said.

Palm oil price trends in ringgit per metric ton. Source: The Financial Times

Manipulation of waste cocking oil

Palm oil prices have recovered in recent weeks to around 4,700 ringgit ($1,081) per tonne after Malaysia, the world’s second-largest producer, said heavy rains in Southeast Asia would hit output this year. Indonesia had previously announced plans to support domestic demand by introducing a B40 biofuel mandate to replace the previous B35.

Rabobank analysts expect the requirement to help prices stabilize and rise after a January correction. Limited annual production in Indonesia and Malaysia will provide additional support. They predict a global palm oil shortage by October, the period the industry considers the annual cycle of growing, harvesting and distributing the raw material.

As the market adjusts, the EU plans to further tighten its palm oil purchasing standards by the end of the year. Despite a major delay to the deforestation regulation, producers say that palm oil supplies, if adopted, will be expensive. “The cost of supplying palm oil to Europe will increase significantly as it will force producers to restructure and make sure they are sending oil to Europe that meets EU requirements,” he said.

Tags: prices, Malaysia, palm oil, Indonesia