Palm oil market faces uncertainties amid weather challenges, supply constraints

Malaysian Rating Corporation Bhd (MARC Ratings) anticipates the palm oil market to continue to face significant uncertainties heading into 2025, with supply-side challenges exacerbated by adverse weather conditions and a slower replanting pace.

The rating agency noted that palm oil prices in 2024 have remained elevated due to global supply constraints, driven by reduced exports from the largest palm oil producer, Indonesia, as well as recent adverse weather conditions in Malaysia.

“Looking ahead, palm oil prices are expected to remain high, averaging RM4,600/metric tonne (MT) in 2025 (2024F: RM4,200/MT; 2023: RM3,812/MT).

“Upside risks include lower-than-expected soybean production and Indonesia’s increasingly restrictive palm oil export policies. Conversely, downside risks include weaker-than-expected demand from key markets such as China and India, weather conditions, and increased production of other substitute edible oils,” it said in a statement.

MARC Ratings said the demand for palm oil in biodiesel production remains robust, supported by policy mandates in Indonesia.

It said the biodiesel blend rate is set to increase to 40 per cent (B40) in 2025 from the current 35 per cent (B35), with further plans to raise it to 50 per cent (B50).

The Indonesian Palm Oil Association estimates that achieving B40 could drive demand higher by an additional five million MT.

“This increase underscores the growing role of biodiesel as a driver of palm oil consumption,” it said.

Global edible oil demand remains important, as palm oil is usually a cost-effective alternative to other vegetable oils.

Palm oil is also a key feedstock for processed foods.

According to the United States Department of Agriculture’s latest estimates, the global import volume of palm oil is forecast to rise to around 44.6 million MT in 2025 (2024: 42.9 million MT), while domestic consumption is projected to reach 78.3 million MT (2024: 75.1 million MT).

“Based on current prices, palm oil is positioned higher than substitutes such as soybean and sunflower, which may constrain demand growth,” the agency said.

Price effects caused by regulatory changes, such as India’s hike in edible oil customs duties and the delayed implementation of the European Union Deforestation Regulation to 2026 are expected to balance out.

As oil palm is a weather-sensitive crop, palm oil production will face constraints due to persistent wet weather conditions, leading to flooding in key production states.

The Malaysian Meteorological Department forecasts that this high rainfall trend will continue at least through the first quarter of 2025, with a potential for La Niña weather conditions.

However, as weather conditions normalise in the latter half of 2025, drier weather could improve growth and harvesting conditions, although its full impact on production may only be realised in 2026.

Replanting progress for oil palm trees remains below target. Malaysia replanted 132,000 hectares (ha), or 2.3 per cent of its total planted area, in 2023 (2022: 97,130 ha, 1.7 per cent), falling short of the government’s annual target of four per cent.

“This target represents 228,000 ha but is still well below the 450,000 ha of trees aged 25 years or older that need replacement, due to yields declining significantly after 20 years,” it said.

Tags: Malaysian Rating Corporation Bhd, MARC Ratings, prices, Production, Malaysia, biodiesel, palm oil, Market